Commentary, 11/12 2014

Published Dec 5, 2014
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Cover 11/12 2014

Constant Change

Change is inevitable – but the problem is that it’s not always for the best. And often, recent events colour how we interpret change as it unfolds.

If you were lucky enough to be in Oslo in November and attend the Autumn Conference, when the International Energy Agency’s World Energy Outlook was presented, you would have heard a light-hearted exchange about how difficult predicting the future can be. The conclusion of the exchange was that predicting the future – forecasting how the next year or coming decades might play out – is actually not so difficult. The difficulty is getting it right.

Considering oil and gas prices at the end of 2014, few would have predicted the slide that has occurred over the last few months. A number of factors have come into play, including an increasing stability in supply levels that are meeting global demands. As we prepared to go to press, ahead of an OPEC scheduled meeting, speculation is that these oil-producing states could call for output cuts.

It can be argued that coupled with increasing efficiency in energy use, which has mitigated the growth in demand, the industry has done it’s job too well. Technological advancements and refinements over the last decade have ushered in a new “Golden Age” – what the IEA referred to as a new age for gas only few short years ago. These technologies – for tight oil as well as gas – have transformed the US energy market, which has impacted markets around the world. And these technologies are increasingly being applied to and recovery rates across the globe increase reserves in regions where little activity existed before.

Although supply levels are currently high, the cost of extraction remains daunting, and the mounting costs of oil and activities has become an increasingly hot topic. The current dilemma is that much of the current cost of doing business is due to the increasing difficulty of extraction 

While technological innovations can do much to mitigate extraction costs, the time it takes to bring new technologies online doesn’t help the bottom line in the short term. But viewing current cost woes through the lens of a long-term perspective can help.

The IEA’s New Policies Scenario predicts energy demand growth to increase by 37% to 2040, an average annual rate of growth of 1.1%. This scenario sees energy demand growth shifts away from the OECD countries, and that China will dominate energy demand growth until the mid-2020s. As China’s population levels off and its economic growth slows roughly a decade from now, India is expected to take over as the largest source of energy demand.

Despite the strong growth, according to the IEA, energy use per capita in 2040 in non-OECD countries is still well below the average of OECD countries in the 1970s at comparable levels of GDP per capita. Technological progress and improved energy efficiency, however, allow a higher level of demand for energy services to be satisfied per unit of energy.

The IEA predicts that by 2040, the world’s energy supply mix will be divided into four nearly equal parts: oil, gas, coal and low-carbon sources.

This scenario projects that demand for oil will rise an additional 14 million barrels per day, to reach 104 mb/d by 2040, despite measures and policies aimed at promoting energy efficiency and fuel switching.

Technology has done much to increase recovery rates and open new resources, but as provinces age and as demand increases, the challenge is to replace existing reserves over the coming decades.

By some estimates, the oil price slide in the latter half of 2014 could reverse itself in the coming months – a welcome change. But even if that’s the case, there’s still much to do, considering the challenges to reign in costs and replace diminishing reserves.

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