Every summer more than 50,000 opera fans make a pilgrimage to the city of Bayreuth, Germany. It is here that controversial and larger-than-life German composer Richard Wagner launched his Bayreuth Festival in 1876 – a festival that continues to this day.
The festival’s centerpiece is a performance of a series of four operas known as “The Ring of the Nibelung,” based on a medieval Germanic epic poem that is to German-speaking Europe what Beowulf is to English speakers.
It took Wagner 26 years to write the complete Ring Cycle: Das Rheingold (The Rhine Gold), Die Walküre (The Valkyrie), Siegfried and Götterdämmerung (The Twilight of the Gods). And it remains his most enduring work.
I should add that endurance is precisely what you must have to sit through one of Wagner’s operas, let alone the entire cycle. A performance of Götterdämmerung lasts nearly six hours!
I’m no big opera fan, but the Ring came to mind as I read an article titled “Supermajordämmerung – The Twilight of the Supermajors,” in the August 3 edition of The Economist.
In the article and an accompanying editorial, The Economist paints a dark picture of the future of integrated international oil companies, based on the oil peak it sees ahead.
But the peak they’re referring to isn’t peak oil in the sense of declining global oil supply. Instead they see global demand for oil peaking, pointing to the fact that for rich countries (OECD nations) demand peaked in 2005.
This stands in contrast to forecasts by the U.S. Energy Information Agency (EIA), which projects non-OECD liquids demand growing by 53 percent between 2013 and 2040.
Other forecasts show similar projections, reflecting an underlying assumption that developing nations growing their economies will increase oil consumption to fuel transportation.
The Economist argues, however, that many of these fast-growing economies, notably China, are themselves imposing the type of energy efficiency measures that are curbing OECD demand and evaluating emerging technologies to leapfrog the OECD development path.
They point to two trends driving this anticipated drop in oil demand:
♦ First, the abundance of natural gas being produced from unconventional reservoirs, as well as massive conventional discoveries, such as those off east Africa.
They see accelerating fuel switching from oil to natural gas throughout the transportation, petrochemical and power generation sectors.
♦ Second, the engines used to move vehicles of all shapes and sizes are becoming increasingly efficient – doing the same work with less energy input.
As this efficiency trend continues it will slowly but surely reduce total oil demand.
In addition to a drop in oil demand, the rise of dynamic, progressive national oil companies (NOCs) also has changed the competitive landscape. Frequently, they are the gatekeepers of their country’s oil resources – and increasingly these firms are formidable competitors with IOCs outside of their home countries, often with government backing.
The shift of research and development from oil companies to the service industry has commoditized many of the new technologies required for success in both conventional and unconventional reservoirs. It’s available to anyone off the shelf. And I heard fear expressed several years ago that service company resources could be fully consumed by NOC clients, or at least drive prices for services even higher.
This isn’t the first time that The Economist has written splashy headlines about significant energy transformations. In fact, I once heard a fantastic talk by Adam Sieminski, former chief energy economist for Deutsche Bank and now head of the U.S. Energy Information Administration, on oil markets that was illustrated entirely by past covers of The Economist. As I recall, their reporting tended to follow rather than lead the market.
But I do appreciate The Economist’s questioning the general consensus. The fact that non-OECD could potentially follow a less energy-intensive development pathway would – if true – have significant impact on oil markets.
There is no doubt the industry is more competitive with the rise of the NOCs, and the prizes being sought are harder to find and more expensive to produce. We’re also seeing companies like ConocoPhillips spin off its downstream operations, leaving two companies to each focus on its core activities.
Whether there will be massive fuel switching as The Economist predicts, especially in transportation, remains to be seen. Sure, we’re seeing movement in this direction, but replacing entire fleets is not a rapid process. And widespread consumer adoption will require significant investments in refueling infrastructure.
Also remember that reduced oil demand doesn’t mean no oil demand. In fact, when you look at the EIA forecasted liquid fuel requirements for rich countries through 2040 it is relatively constant at current levels. The industry needs to find and produce significant oil volumes just to stay even.
Oil remains essential to modern society. Finding and responsibly producing it in an increasingly competitive world will require talent, ingenuity and innovation. It’s going to take smart science, new technology and business savvy.
The industry may not look the same in coming decades, but I believe the future is brighter than The Economist suggests.
Because the end of oil – much like the conclusion of a Wagnerian opera – is still a long way off.