Peak Demand, Relentless Supply – Paper 2

A summary of Paper  2 is shown here – the full analysis is in the White Paper section.

Three Key Questions

Paper 1 discussed two fundamentally different world-views of the energy transition. The industry consensus is that it will be gradual, drawn-out and orderly. The external view was the opposite – the transition is likely to be rapid, sharp and create major disruption.

To analyse this further, this paper concentrates on three core issues facing the industry today, using the framework developed in Paper 1 to form another external view.

The final paper in this series will look at options and strategies for the energy industry in this context.

Paper 2 – Peak Investment

Peak demand will not just come by itself. It will raise a number of key issues at the systemic level that will impact incumbent companies.

Three of these are covered below and evaluated using the external view framework – this provides different answers to the ones being assumed today.

When is Peak Investment ?

What is the shape of Demand Post-Peak, and

What will be the Reaction of OPEC?

The External View on Major Post-Peak Issues

Peak Investment – In the Past – a higher productivity era lies ahead; less capital, more output

It is highly likely that in real terms the oil and gas industry has passed a peak of capital investment. With peak demand a growing reality, and relentless supply from both conventional and non-fuel forms of energy, most firms will use investment to optimise current production and decline rates, and efficiently transform new assets into stable output.

This can be done over the medium term at far lower levels of capital than in the past – no megaprojects for example. Investment by low cost players such as OPEC and US onshore may increase, however, for strategic or policy reasons. In aggregate though the high-end of the investment curve is gone, so the total sector spend will decline, while supply increases.

Shape of Demand Post Peak – Gas An Uncertain Residual, Oil Plateaus Then Sharp Decline

Both Gas and Oil become residuals between flattening demand and alternative sources of energy.

Gas is an “uncertain” residual between legacy coal infrastructure and policies and investment in renewable forms of power. It had been assumed that gas would form a bridge to renewables from more polluting coal. However, the persistence of the coal market especially in Asia, and the rapidly growing alternative of more home-grown renewable technology, especially in China, suggests this market opportunity for gas supply could be much narrower than expected.

For oil the major threat to future demand is the speed of adoption of EVs. On mid-case scenarios, peak demand is followed by a 5-10 year plateau, and then a steep decline as the exponential development of the EV fleet displaces significant volumes of oil demand over a relatively small period of time.

As China is one of the leading users and developers of EVs this removes demand growth quickly and accelerates the decline. The incumbent industry still perceives EVs as a small percentage of the overall fleet over time – this misperceives the exponential shape of the demand decline curve as the transport market now integrates with the wider energy market via electricity, leaving oil as a rapidly declining residual.

OPEC’s Reaction Post Peak – Entering the End Game with Increased Supply

If the oil and gas market demands follow the shapes post-peak as outlined, OPEC faces a world of declining oil demand in a relatively short space of time. It moves to a buyer’s market, and oil becomes a residual as the wider energy market of electricity displaces its consumption at an exponential rate.

OPEC needs to extend the plateau phase of demand contraction, and dominate market share in the steeper decline phase by establishing long-term, stable relationships. This all suggests it needs to move to maximise the current value of existing resource by rapidly increasing production to ensure oil is seen as an abundant cheap fuel in the energy transition phase.

Curbing supplies will hasten the arrival of alternative energy, and undermine long-term confidence in OPEC as a seller in an increasingly buyer’s market