Prices down or up – it doesn’t matter. The world’s oil sector is in the endgame
In my book, The Winning of the Carbon War, I argue that 2013 to 2015 were turn-around years that will lead to decarbonisation of the global economy. The course of 2016, I suggest, has been consistent with a global transition from fossil-fuel dominance to the zero-carbon economy. If this analysis is correct, the oil and gas industry is heading for a future very different to its past - 2017 will simply confirm the trend.
Three fundamental megatrends are at work. First, society is awakening in critical mass to the twin threats of climate change and air pollution - and responding. Second, an energy insurgency is disrupting established energy markets, fast. Third, the energy incumbency is facing an array of serious problems not always related to the other two megatrends.
The first megatrend is the awakening of society. Every independent nation on the planet, 195 of them, adopted the Paris Agreement on climate change in December 2015. Few expected that to be feasible. Almost nobody predicted the teeth the treaty has: it is essentially a decarbonisation pact. Few expected it to come into force. It has, in less than a year.
The risk of stranded assets, and of capital deserting fossil-fuel industries, is growing apace. The G20's Financial Stability Board has set up a Taskforce on Climate-Related Financial Disclosures, with a brief to specify the information investors need so they can switch capital en masse away from carbon fuels. It reports in December 2016.
Meanwhile, air pollution is rising alarmingly in cities. It topped the World Health Organization's league table of human killers in 2015, with 3m deaths. Regulators and cities are acting, not least in China. As a consequence of this and regulation in the wake of the VW emissions-cheating scandal, key figures believe that diesel may now be forced out of the market.
The second megatrend is an energy insurgency that brings disruption, fast. Solar prices have plunged so steeply since 2006 that analysts talk of "the Terrordome", invoking both a fairground ride and the fear felt by those determined to defend a status quo in which solar economics now beats all-comers in a growing number of markets. Wind costs have plummeted too. Storage and electric vehicles (EVs) aren't far behind.
EV sales rose by 60% in 2015, around the rate the Model T Ford grew in its early years, and 2m are now on the roads. This has happened despite a halving of the oil price. At 2016's Paris motor show, car-makers queued to unveil their latest electric models. Bloomberg calculates that EVs will displace 2m barrels a day of oil - enough, in the past, to trigger demand crashes.
All this is being noticed in unexpected places. A recent headline in the newspaper of choice for British conservatives, the Telegraph, reads: "Holy Grail of energy policy in sight as battery technology smashes the old order". Its international business editor concluded: "This country can achieve total self-sufficiency in power at viable cost from our own sun, wind, and waters within a generation. Once we shift to electric vehicles as well, we will no longer need to import much oil either. Rejoice." In Abu Dhabi, crown prince Mohammad Bin Zayed al-Nahyan has told his people: "In 50 years, when we ship off the last barrel of petrol, we will not be sad. I promise you, my brothers and sisters, we will be celebrating." The source of the joy is the UAE's investment in zero-carbon energy and other 21st-century industries.
The third megatrend involves an incumbency in increasingly deep trouble - never mind climate change. The Financial Times writes of "the long twilight" of the big oil companies. Firms often drilling at a cost of recovery exceeding the price their oil and gas fetches are borrowing money even to pay dividends. Together they owe $3 trillion.
Delivery of major projects against clock and budget has been almost universally dismal for years. In the US shale belt, more than 100 companies have gone bankrupt, as banks call in loans that cannot be serviced. It is increasingly doubtful that the US shale model is sustainable at any kind of scale, much less exportable to other countries, where fracking is increasingly being banned anyway. More than 350,000 oil and gas workers have lost their jobs around the world, including more than 60% of the US shale workforce. Oil discoveries are at a 70-year low, with barely one barrel in 10 consumed in 2015 replaced. On this basis, notwithstanding the prospect of rapid demand destruction by EVs, HSBC predicts a global supply crunch within a year.
It will take more than an oil rally to turn all this around, as industry leaders admit. "It's not really like just turning on the light switch", as the chief executive of tight oil producer EOG Resources puts it.
Not all the news is bad. In the beleagured utility industry, which faces an existential threat, many companies are endeavouring to leap on the energy-transition express. Some of their early results are encouraging. The oil and gas industry will follow, I predict. Which of the majors will break ranks first? My money is on Statoil or Total.
This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here