Big Oil & Rising Renewables
Fossil Fuels at a Fork in the Road
Peak oil theory is the concept that there is a point where the world’s production of oil will reach the maximum amount of production, after which the amount we can produce will start to decline. This comes from American geologist and geophysicist Marion King Hubbert, who theorized that oil production ultimately has a bell-shaped curve.
The theory has been around since 1962 and was prominent during the oil embargo brought on by the Organization of Petroleum Exporting Countries (OPEC) in 1973.
While this theory has been on the horizon for decades for oil producers, ironically, we may actually be approaching peak use of oil as fuel.
Supply and demand
As Reuters reported in September 2021, oil producers and analysts are revising their forecast about the future of oil: “The COVID-19 pandemic this year has dented oil consumption and brought forward forecasts by energy majors, producers and analysts for when the world’s demand for oil may peak. Demand was about 100 million barrels per day (bpd) in 2019 and has yet to recover to that level because of the pandemic. The rise of electric vehicles and a shift to renewable energy has also led to revisions in forecasts. There is no consensus on when oil demand could peak, but the predictions could affect oil exploration and development plans.”
Not only does it appear that demand will peak, the capacity to produce oil is also diminishing. In fact, according to the United States Energy Information Administration, the last refinery that had significant capacity was built in Garyville, Louisiana back in 1977. Refineries have since been upgraded but no significant new builds have taken place.
According to S&P Global Commodity Insights, “The nation’s ability to refine crude oil into fuel and other products fell below 18 million barrels a day at the beginning of 2022 and hit its lowest level since 2014.” This dip comes amid refinery closures and a surge in oil prices as gasoline and diesel at retail have hit record highs.
The pandemic triggered a crash in crude demand, both in the U.S. and Canada, including gasoline, diesel and jet fuel, but there are bigger questions for the industry’s future. What are the challenges ahead for U.S. refiners?
“I don’t think you are ever going to see a refinery built again this country,” Chevron CEO Michael Wirth told the Washington Post in an article about the change in oil demand. “It’s been 50 years since we built a new one in a country where the policy environment is trying to reduce demand for these products, you are not going to find companies to put billions and billions of dollars into this.”
An example of how this is playing out can be seen in a large refinery in Houston, Texas which was up for sale recently. It received exactly zero viable bids and the current owner plans to shut down the 700-acre operation within the next year. This is a site that refines approximately 264,000 barrels of crude per day.
And owners of one of the largest refineries in the U.S. northeast, the Philadelphia Energy Solutions refinery, are spending hundreds of millions to convert the 1,300-acre site along the Schuylkill River into a high-tech campus for green e-commerce and life sciences companies.
The U.S. administration’s environmental priorities, along with rising public and corporate concern over climate change, will likely see many refineries obsolete in the not-too-distant future.
Energy for transport
When it comes to crude oil use, it is vehicles first and everything else a distant second. Road-related vehicles account for nearly 50 percent of oil demand.
From big-thinking Elon Musk’s Tesla to the major car manufacturers, there is a very clear shift to electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) that either dramatically reduce the need for crude oil or eliminate it altogether.
Deloitte research projects a compound growth rate of 29 percent over the next 10 years, which could potentially add up to more than 31 million EV sales by 2030. And early naysayers about the supporting infrastructure for those vehicles to power up on route have a more positive view of what’s to come: EV charging ports will soon outnumber gas stations in the U.S.
Governments are also setting goals to move the auto industry away from dependence on crude oil. For instance, the Biden administration is introducing standards that require manufacturers to ensure that 50 percent of the cars they build have fuel cells or are hybrid electric vehicles by 2030. And if half of all vehicles were electric by 2030, it could lead to somewhere between 60 and 70 percent of all vehicles being electric by 2050.
When you look at these numbers, the question for oil producers is, what will the future hold for the industry and what can be done to adapt to a changing market?
Low carbon, carbon-neutral, and green technology have all become common terms as countries around the word introduce industrial policies that will reduce emissions to help the health of the planet.
Pressure on petroleum producers
At first blush it may seem that petrol producers and this shift to green resources are mutually incompatible. But the truth is that if the world is to reach climate-related goals, the oil and gas industry that will have one of the largest roles to play in this future. The industry is currently producing fuels that generate about 33 percent of the world’s emissions.
The change for these companies is already beginning to come from within with activist investors pushing some of the big players in the industry for plans to lower emissions. And both retail and institutional investors are also becoming more conscious of investing in sustainable technologies.
How the industry adapts to these pressures will have a direct impact on the future level of emissions.
An NPR article examining the future of big oil notes the following about European oil and gas producers: “Companies such as Total in France, BP in Britain, Eni in Italy and Equinor in Norway are making ambitious pledges to switch, over time, from making money off oil to making money off sunshine and wind. In fact, they no longer even want to be called oil companies, preferring energy companies.”
The article goes on to add, “There are signs of real resources being dedicated to this promised strategic shift toward renewables. BP just bought a pipeline of nine gigawatts of solar projects in the United States. Total invested billions in a major solar producer in India.”
Ultimately there are three main obstacles that oil and gas companies need to address to not only help the environment, but also secure their future growth. They need to find a way to produce more energy while at the same time cutting the emissions they produce.
They need to manage demand for oil while struggling with diminished capacity. This is where the issue of reduced investment in refineries has made it harder to produce oil for customers. We have already experienced the oil shock in the first half of 2022.
And the third challenge is that they will need to meet investor expectations as they transition to becoming energy companies. After all, investors will still demand growth.
Looking at the oil and gas industry in 2022 seems very much like looking at a fork in a road.
Continuing business the way it has always been done no longer looks like a viable option. The future for the industry, and in many ways the health of the planet, will depend on the choices oil companies are making now to adapt to a future that will increasing rely on renewable energy sources and less on crude oil.