an opinion editorial written exclusively for ANZMEX 

4 May 2020
By Chris Sladen

Energy matters – Towards the end?

As the global economy continues to unravel at a frightening pace, and oil prices fall into previously unseen single digits per barrel and in some cases negative numbers, many readers have asked: Is this the end of the oil industry?

Low oil prices are probably here for some years. The reasons are simple – there is far more supply than demand. Demand for products has fallen dramatically, often 30-60%. Most economies are in deep deep recession, many supply chains have become fragile and currencies are unstable. GDP forecasts vary by country but most indicate a drop in GDP of 5-12%. An economic revival will take time and could be patchy; even then there may be ‘a new normal’ which is not like life was a few months ago.

Recent cuts in oil production are clearly nowhere near enough to remove the oversupply. Attempts to agree reductions in production have not restored a balance between supply and demand. And, there is also no mechanism to ensure that countries honour the cuts they promised.

Storage facilities are crammed full – whether it is tanks, strategic stockpiles, refineries, pipelines, underground salt caverns or ships. When all storage is full, shutting in and stopping producing wells and refineries becomes the only option. Cash strapped producers might continue producing even though it is unsustainable. Producing oil that creates no value is not a good way to treat and safeguard a country’s precious natural resources.

Stopping producing wells and restarting them later on contains a myriad of technical issues. Think of this like switching your car engine off and leaving your car outside in the yard for 18 months. Chances are it won’t be a smooth restart.

Demand will likely come back slowly as industries and businesses restart, global travel tentatively resumes, kids go back to school and the pandemic is eventually defeated. This should ease the issue of oversupply. In the meantime, if oil prices inch upwards, there are plenty of shut-in wells that can be re-opened and new wells ready to be drilled to bring on new production. There would need to be a dramatic and unexpected interruption to oil supply to change the outlook, or another agreement on further deeper production cuts.

The improvement in air quality due to the use of less fuels and of energy generally is noticeable in recent weeks. But there is nothing to suggest there is a permanent change of behaviour about to happen. Most countries are still addicted to oil (and coal and natural gas). The reserves to production ratio for oil remains around 50 years. Indeed the recent collaboration amongst 23 producer nations, an expanded cartel, to cut oil production is all about producing fewer barrels, increasing the margin per barrel, and extracting more from consumers’ pockets. This is not a visionary change of direction and switch to lower margin green investments. It does not mean that the energy transition will happen more quickly.

Cheap oil leads to it being much more competitive for consumers against other energy choices – natural gas, coal, nuclear, hydrogen, biofuels and other renewables. Energy companies will need to quickly adjust operating plans and reset strategies to remain successful for what may be the new normal. Governments will need to revisit sources of tax revenues.

In my head, I often hum the tune The End, a famous song from the 1960s performed by a band called The Doors. Distraught at losing the love of his life, the singer is caught up in anger, confusion and pain. He cannot see a path forwards and wonders if this is the end. But he realises he must move on to whatever comes after. So, is this the end of oil? No of course not, but some things will never be the same again.

About the author:

Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.

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ANZMEX ORG A.C. is a politically neutral business council with no political affiliation. The views expressed in this column are not necessarily representative of the official views of ANZMEX or any of its officers or staff.