Nicholas Newman Energy Focus October 2017
Energy companies are operating in a fast-changing environment, in which new sources of fuel are beginning to become price competitive, fossil fuels are facing tougher environmental regulations and there is a real prospect of slowing demand for their products. This feature looks at how energy companies are adapting to the onset of a low carbon era.
The prospect of peak oil
Until very recently, governments and oil companies feared the prospect of peak oil, a time of expensive and declining supplies. Recent exploration and production advances delayed peak oil until the mid – century but, in a rapid turn-around, the industry now faces “the prospect of peak demand”, according to Jon Clark, UK & EMEIA Leader Oil & Gas Transactions at Ernest and Young, a view which has subsequently gained widespread credence. Peak demand, a time when demand for oil significantly slows and begins to fall, is expected to arrive between the early 2020s to the mid- 2030s, depending upon the speed of energy efficiency savings, adoption of electric vehicles, renewables and the switch from oil to gas in power generation. Already, oil companies, have diversified into natural gas, unconventional shale, and renewables such as wind and solar, for example, Shell bought BG[i], to acquire its expertise in natural gas and LNG . Shell has also diversified into renewables and has just announced that it will begin to supply electricity to its forecourts and industrial customers in the UK. [ii] [iii] Italian oil giant Eni, has reduced oil exploration in favour of gas and made spectacular finds off the coasts of Egypt[iv] and Mozambique. [v] Likewise, French energy giant Total has begun to supply renewable energy to customers. Acquisition, as a means of market entry into other sources of energy, could be expected to increase as companies plan for peak demand. However, the logical strategy, of harvest and exit has so far only been implemented by Dong Energy, which announced its exit from oil in favour of renewable energy production and distribution. [vi]
As oil fields reach the end of their useful life, especially in the North Sea, Alberta in Canada and Texas, companies are beginning to consider what to do with their redundant infrastructure. “At present, there are two main options being discussed—removal and leave in place,” says Paul Jardine, CEO of Quatre Ltd, a provider of exit strategy management solutions (ESMS) to the oil industry. Currently, regulations favour the removal of oil and gas infrastructure from depleted fields. A case in point is the North Sea, where many fields are reaching the end of their life. Decommissioning costs are estimated at £50 billion[vii] to be shared between companies and the UK Treasury. Whilst the oil majors have set aside funds for this eventuality, smaller companies face financial, engineering and logistical challenges in dealing with redundant infrastructure.