Meeting Rising Oil Demand with New Thinking

Shell made headlines last month when, on a conference call with investment analysts, its Chief Financial Officer Simon Henry said, “We’ve long been of the opinion that demand will peak before supply. And that peak may be somewhere between five and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

I read that quote in a Nov. 2 news article on Bloomberg.com, which went on to read that this forecast put Shell at odds with Exxon and Saudi Aramco, as well as the World Energy Council, which all see demand growing through 2030 to 2040 and beyond.

The casual reader of stories like this might believe the end of oil is upon us and that within the next one or two decades, the oil chapter of our energy story will be written and come to a close. But, in fact, these forecasts are about how much demand for oil will grow. And when demand peaks, it doesn’t then fall to zero.

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Shell made headlines last month when, on a conference call with investment analysts, its Chief Financial Officer Simon Henry said, “We’ve long been of the opinion that demand will peak before supply. And that peak may be somewhere between five and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

I read that quote in a Nov. 2 news article on Bloomberg.com, which went on to read that this forecast put Shell at odds with Exxon and Saudi Aramco, as well as the World Energy Council, which all see demand growing through 2030 to 2040 and beyond.

The casual reader of stories like this might believe the end of oil is upon us and that within the next one or two decades, the oil chapter of our energy story will be written and come to a close. But, in fact, these forecasts are about how much demand for oil will grow. And when demand peaks, it doesn’t then fall to zero.

Peter Tertzakian picked up that idea in his Nov. 10 column in the Financial Post. He wrote, “recent data suggests that the world will soon touch a milestone rate of oil consumption:100 million barrelsevery day.” He thinks that will occur in 2018.

Tertzakian, chief energy economist and managing director of Calgary-based ARC Financial Corp., was the all-convention luncheon speaker at our Annual Convention and Exhibition earlier this year in Calgary and wrote a book in 2006 entitled, “A Thousand Barrels a Second,” talking about the implications of global oil consumption exceeding 86.4 million barrels of oil per day.

“There is a lot of popular talk about using less oil, the end of oil, and other headline-grabbing projections of imminent demise,” he continued. “But oil is a stubborn tree-climbing animal. Just when you think that you’ve trapped it from rising higher, it gets away on you and keeps climbing.”

Eventually demand will flatten and peak. But consider how much oil must be found and produced simply to maintain a demand growth rate of zero percent. And who is going to do it?

Tomorrow’s Oil Industry

One feature of this downturn is that the long-heralded “crew change” is upon us within the majors and large independents. And this shift, combined with technological and political challenges we face in producing the oil and natural gas the world demands, will require new thinking about how oil and gas companies operate.

In September of this year, the consultancy McKinsey & Company published an article entitled, “The oil and gas organization of the future,” available on its website. In the article, they identify three trends that are disrupting our industry:

  • Resource abundance is reshaping the energy landscape, driving prices down and putting pressure on the historic centralized business model that most oil and gas companies have adopted. They point out that different resource types actually require different operating structures to succeed — the model needed to exploit a deepwater discovery is not what you need to efficiently manage a resource play.
  • The use of data, analytics, machine learning and (possibly) artificial intelligence is what enables operators to boost efficiencies in this low price environment. They see greater numbers of knowledge workers being displaced by these technologies, and the skills demand shifting to those who can manage this interplay between data and interpretation.
  • Demographics will drive the oil and natural gas company of the future and millennials will make their marks on the industry, both with their natural facility with data and technology and their characteristic desire to not simply have a job, but to actually pursue meaningful work that doesn’t merely deliver a paycheck.

The authors of the article identify five “big ideas” that will drive companies in the future:

  1. Organizational agility — creating a responsive and flexible company
  2. Digital organization — positioning to make use of the flood of data available as the “Internet of Things” expands
  3. The millennial-managed organization — this generation’s needs and desires will affect how companies behave and operate
  4. The decentralized company — structuring firms to match the targets they’re pursuing, with varying degrees of centralization and distributed decision-making
  5. A redefinition of what’s core — understanding at a deep level what the organization’s strategic advantage is and leveraging that

Have they gotten this right?

I have no idea, but the entire article does make for interesting reading and stimulated my thinking about how the petroleum industry and our profession as petroleum geoscientists may evolve in the coming decades, because it will surely change.

It’s been a tumultuous year by any measure. But as we leave 2016 behind and as AAPG prepares to celebrate its 100th anniversary in 2017, we’re looking forward and envisioning how we can better meet the energy needs of a growing world.