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Oil companies must change or be changed, says think tank

Oil companies must adapt to a changing energy industry or risk missing new business opportunities, a new report by Chatham House, a UK think tank, claims

In What next for the Oil and Gas Industry, authors John Mitchell, Valerie Marcel and Beth Mitchell argue that to maintain funding for existing projects and secure investment for new ventures companies must embrace advances in technology, politics and oil-demand patterns.

“The structure which made sense for the oil industry in a different era may not make any sense now,” Beth Mitchell says. “As we go through this next era the oil and gas industry will look very different in a few years time. The choice [for oil companies] is to change or to be changed.”

Mitchell argues that the landscape of the global upstream oil sector has been transformed by the rise of independents and service companies, many of which have pioneered cutting-edge technologies such as hydraulic fracturing and deep-water extraction techniques. This has not only increased competition within the upstream sector for acreage and resources, it has also opened up new plays, changing the global energy supply landscape.

This has already happened off the east African coast where exploration work by independents has opened up a new gas frontier in less than three years. Anadarko Petroleum’s Prosperidade field in Mozambique – which could contain up to 3 trillion cubic feet (cf) of recoverable gas – and Tullow Oil’s work on the prolific Jubilee field offshore Ghana are just two recent examples of this.

“The industry hasn’t fully taken stock of the changes. There are more serious [independent] partners to choose from now,” adds co-author Valerie Marcell. “The door for partnerships is not closed but it’s a much more competitive environment.”

It is not just the business landscape that is changing but historical oil-demand patterns, too, as Asian consumption continues to increase at a faster rate than in the West.

Although the International Energy Agency (IEA) has revised down its growth forecast for Chinese oil demand as economic expansion has slowed, Asian demand growth is still far outstripping that in developed countries.

In its August oil market report the IEA said Europe’s oil demand was likely to fall by 2.6% in 2012 because of the region’s sovereign debt crisis. Demand in Asian OECD countries is expected to rise by over 3%, but mainly bolstered by Japanese utilities buying oil to replace lost nuclear generation.

Global oil-demand projections for 2012 and 2013 increased by 100,000 barrels a day (b/d), to 89.8 million b/d and 90.6m b/d, respectively, while Asian demand grew by 1.2m b/d in the second quarter of 2012, the IEA said.

This increasing demand will also ramp up competition for development opportunities from resource-hungry Asian nations, Chatham House said.

Paradoxically, while Asian oil demand keeps rising, a tangled mesh of environmental and political issues are now weighing on future consumption in the transport sector, the key segment in global oil use.

Driven by high oil prices and more stringent environmental regulations aimed at curbing carbon emissions, consumption of oil in transport (which accounts for half of all global oil demand) is being curbed.

At the end of August the US raised fuel efficiency standards for cars, mandating them to nearly double the average mileage to 54.5 miles per gallon by 2025. This will reduce US oil consumption by 12 billion barrels over the course of the programme, or 1.5m b/d, by 2030, claims US authorities. That is equivalent to all imports from Saudi Arabia and Iraq in 2010.

“The industry is becoming more subject to [government] interference but this is a time for evolution not denial,” says Chatham House’s John Mitchell. “Oil is now seriously competing with vehicle manufacturers who are producing fuel-efficient cars. What used to be a safe market for oil is no longer safe.”

And technology is the key to opening up new markets for oil and gas and securing future investment, Chatham House said. Unlocking new reserves such Brazil’s deepwater pre-salt resources and the 6,622 trillion cf of shale gas the IEA reckons is recoverable globally can only be done with investments in technology. In short, industry focus has gravitated away from the previous peak oil debate to innovate solutions for extraction.

“The foreseeable problem is not finite resources but the rate at which these very large resources can be converted into reserves for potential production,” the report says. “There is no clear trend; all depends on investment by competitors for the transport market and on the creation of new reserves.”

Yet despite reports of a wealth of recoverable shale gas globally, Chatham House is bearish about a so-called golden age for the fuel. Last year, the IEA flagged the beginning of a “golden age of gas”, when it forecast that global use of the fuel would rise by more than 50% from 2010 levels and account for more than a quarter of global energy demand by 2035. The IEA said in June that development of unconventional gas could also boost global production by 55% by 2035 to 180 trillion cf per year.

A delicate balance between gas prices that are “low enough to increase demand but high enough to increase supply” will be needed to make it commercially viable, Chatham House said.

Henry Hub have prices collapsed amid rising US shale-gas production, dropping from more than $9 per million British thermal units in 2008 to prices now less than half that level.

Electricity demand will decide whether potentially abundant gas supplies are absorbed in the global economy. Much of that will depend on governments’ decision to promote coal, renewable and nuclear industries – or gas.

“The gas industry has a challenge in those restrictive markets,” John Mitchell says. “There may be a golden age but not all that glisters is gold.”

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