Demand side weakness is tied to tariffs, strength of the dollar, and a slow but apparently inexorable increase of market share for renewables and green alternatives to the traditional hydrocarbon supply of needed global BTUs.
Increasing supplies of power generated by wind and solar are finding their way into the nation’s power grid, and utility scale storage systems, such as Tesla’s Megapack, upgrade the reliability of power delivery from these sources.
Utilities around the country are looking to slow or cease deployment of natural gas fired peaker plants (plants that fire up when demand use is projected to peak) in favor of lean alternatives.
For example, Glendale, California, decided to drop a planned $500 million gas peaker project in favor of cleaner, greener alternatives.
On-demand battery storage at scale should spur the deployment of charging stations for electric vehicles, therefore reducing demand for gasoline or diesel.
Trying to project energy demand growth is a murky prospect at best, but the following sources make these notable claims:
- DNV-GL—global demand begins to flatten in 2030 (https://www.ourenergypolicy.org/wp-content/uploads/2017/09/DNV-GL_Energy-Transistion-Outlook-2017_oil-gas_lowres-single_3108_3.pdf)
- Global Energy Institute—global energy demand grows by 27% through 2040, natural gas accounting for most of the BTUs necessary, demand for renewables increases 81% by 2040 (https://www.globalenergyinstitute.org/look-ieas-new-global-energy-forecast)
- EIA—depending on pricing, U.S. crude production declines in the period 2021 (low oil price) to 2041 (high oil price) (https://www.eia.gov/outlooks/aeo/pdf/aeo2019.pdf)
- BP—“renewables … become the largest source of power by 2040,” oil demand plateaus starting in 2030 (https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/energy-outlook/bp-energy-outlook-2019.pdf)
Currently, financial analysts focus on the output and volume adds attributable to unconventional plays like the Utica, Haynesville, Bakken, and Eagle Ford.
However, little attention has been paid to reserves in the rest of the world.
The title of this piece is “U.S./World=6.” It’s pretty simple—about six times as many wells have been drilled in the U.S. than have been drilled in the rest of the world.
There are many reasons for this:
- Stable democracy governed by effective rule of law
- Individual ownership of mineral assets vs government/sovereign ownership
- Sufficient transportation and infrastructure options
- A rich history of multiple operators (i.e. drilling experiments) that advance the knowledge base of all participants improving risk profiles
- Access to investment lending
So, what would happen if other countries started migrating their oil and gas assets toward a U.S. model?
It’s hard to imagine they would devolve mineral ownership to the population at large, but they might begin to think about awarding smaller blocks with more favorable terms to spur investment.
Think about this. There’s a block in Algeria—Tindouf Centre (Tindouf Basins)—that’s roughly 40% the size of the entire Permian. Twelve wells have been drilled in the basin—a drilling density of one well every 2,800 square miles. In contrast, the drilling density in the Permian is approximately one well every ¼ square mile.
Consider that there’s a block controlled by a state oil monopoly that’s approximately one third the size of the Permian. Since the contract was awarded earlier this decade, exactly one well has been drilled.
This is ludicrous.
Governments around the world must wake up and realize the only way to unlock their mineral wealth is to foster competition by providing attractive deal terms and moderately secure infrastructure—at the minimum, decent roads and hopefully some pipeline or rail access to transshipment points.
This is urgently true for countries whose prospectivity is considered questionable or whose development programs are in their infancy.
And … they need to do it quickly. If projections of energy demand are roughly on target, the window for oil demand will be shrinking. If both BP and DNV-GL are correct, oil demand will plateau in 2030. For countries with reserves that are oil rich and natural gas poor, they’ve got scant time to reconfigure their fiscal regimes to quickly attract drilling CAPEX to find and develop their resource base during a time when demand pressures ease and pricing gets soft.
Look to Argentina, where the process of identifying Vaca Muerte sweet spots and exploiting them is underway as endorsed by ConocoPhillips’ recent acquisition of interests in Wintershall’s operated Aguada Federal and Bandurria Norte block.
Set the right conditions, give operators a decent shot at safe, secure, and profitable operations, and—unlike the unnamed state oil monopoly that’s drilled one well in an acreage package one-third the size of the Permian, you get this kind of operator buy-in.
Or look to one of the world’s most controlled economies—China. The Chinese government has recognized that control of the nation’s oil and gas mineral potential must be, at least in part, de-coupled from the major NOCs and allow direct foreign investment to jumpstart technological and capital investment in Chinese basins that will supply the world’s largest population.
Projects such as the East African Crude Oil Pipeline with an estimated delivery rate of 216,000 BOPD, and even the Trans-Saharan gas pipeline (length approx. 2,700 miles—Nigeria to Algeria), and the Trans Africa Pipeline—(nearly 5,000 miles in length delivering fresh water to nearly 30 million people—to be supplied by solar-powered desalination plants), show that countries recognize the need for and can seemingly cooperate on a regional basis to build the infrastructure that supports the oil and gas exploration and development cycle.
Providing tax-free or tax-incentive zones so that service companies can concentrate enough material and personnel in non-hub areas to serve a growing exploration and development effort could significantly reduce CAPEX costs in international plays and perhaps entice nimble, well-managed, well-funded, non-major independents to explore.
Eliminating egregious upfront bonus payments and instead biasing contract awards to work programs would be a useful way to get money turning to the right as opposed to sitting idle in a central bank.
Reversionary changes to more punitive fiscal regimes—for example, Australia’s revamping of its Resource Rent Tax, Romania’s negative legislation aimed at offshore gas development, and Guyana’s balancing of terms now that world-class reserves have been identified, may drive the exploration community away at precisely the time they need to be recruited.
If governments can creatively re-think how they attract and spur oil and gas economic development, worldwide supply numbers will dwarf what we currently estimate as our worldwide recoverable hydrocarbon resource base.
Have ideas on how foreign governments can ignite exploration activity in their countries? Please email me at [email protected].
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