The second report from Platts fifth Annual Crude Oil Markets Conference and Forum in London, from Vaughan O’Grady
Ruth Cairnie, executive vice-president, strategy and planning, Royal Dutch Shell, came to the Platts Crude Oil Markets Conference with an impressive CV: physics and cosmology were just a couple of the accomplishments she could list.
And having a wide-ranging educational and business background certainly helped as she tried to take on the difficult task of summarising diverse megatrends and assessing long-term developments in a keynote address, early in the afternoon of day one, called The New Upstream Environment – Understanding New Risks And Capitalising On Future Opportunities.
Some trends are, on the face of it, easy to summarise. We can, for instance, confidently expect a global surge in demand and global population growth from seven to nine billion people by 2050.
Many more of these future citizens will be from what we today call emerging markets, will live in cities and will enjoy greater prosperity than they do today.
They, rather than North America or Europe, will be most likely to drive demand growth.
With these changes will come stresses – on water and food supply, and by extension, energy.
What Cairnie described as “far greater supply tightness and price volality” will in part be due to the likelihood that new supplies of conventional energy will not be able to keep up with this growth. Meanwhile, of course, there’s the CO2 challenge.
“By 2050,” she said, “we will have to supply over 50 per cent more energy and do that at the same time [as] reducing greenhouse gas emissions to half the levels they were at the beginning of the century.”
One encouraging trend is that renewable energy will play a part. Led by solar, it could provide a quarter of the world’s energy by 2050, which would be, said Cairnie, “an enormous achievement”.
But it won’t be enough. In the next two decades, she suggested, 40 million barrels of oil equivalent per day need to be developed just to maintain production; in other words another four Saudi Arabias need to come on stream.
Could Iraq, Brazil and the Arctic – three potential oil hotspots – supply a significant part of that? And what about shale oil?
Certainly Shell itself is, Cairnie suggested, making a strong showing in efficiency and technological innovation, not just in oil but in gas (“over 50 per cent of our production”) to make new supplies happen.
As she pointed out early in her presentation, however, while there are trends that we can predict, there are also (and, one assumes, will continue to be) geopolitical events that we may not have considered that could affect oil supply and price.
Who would have foreseen the Arab Spring, the Eurozone crisis and ‘black swan’ events like Fukushima?
Even political change through the democratic system is by no means a predictable process — ask Greece – and the turbulent effects of successive waves of structural change in emerging economies are equally hard to predict.
Closer to the immediate concerns of the industry, companies like Shell will worry about access, increasing competition and a deficit in trust that could affect licence to operate.
In this connection, you can pick any safety or environmental concern but Deepwater Horizon clearly looms large and public suspicions about fracking, and concern about water shortages and CO2 emissions are not far behind.
All this comes at the same time as IOCs – and probably NOCs too – face a push towards more challenging hydrocarbons and frontier operating environments, alongside cost escalations and shortage of skills.
Having made it clear that Shell can boast a strong record in tackling these issues, Cairnie was also clear that sometimes it will not be possible for companies to go it alone – that limited resource access and growing competition may require new and innovative partnering strategies between IOCs and NOCs.
And while she, and many speakers at the conference, painted an encouraging picture of advances that could give the world cost-effective access to complex sources of oil and gas there was also a warning for the industry.
Legitimate public concerns over safety and the environment are fuelling a trust deficit requiring “ever higher operating standards and focus on accountability for our actions”, she said.
She continued, “If we do not make the case for being part of the solution to the energy challenge and provide provision for safer affordable and sustainable energy systems we risk continuing to be seen as part of the problem.”
The third and final report from Platts fifth Annual Crude Oil Markets Conference and Forum will be posted on the Oil Review website on Monday 18 June.
Vaughan O’Grady
