New technology and consumer trends in transport may challenge long-term oil demand
The sharp oil price rise since 2003 has revived interest in oil. Oil companies are jostling to secure access to new reserves in Africa, Asia and Latin America. Protectionism and political unrest have curbed investment activity in many areas with cheap, producible, conventional oil reserves.
This, coupled with high oil prices, has triggered the innovation of new technology, turning unconventional reserves previously seen as unprofitable into financially viable fields. So far oil companies have concentrated on shale oil/tight oil production in the US, tight oil/oil sands in Canada, pre-salt oil from Brazil and heavy oil from Venezuela.
The most ground-breaking development within unconventional oil production is no doubt the shale oil revolution in the US. Production has seen an impressive trend since the modest start in 2005 with only a few thousand barrels a day to around 700k barrels a day in 2012 (CGES) – and there is considerable growth potential. We believe that US tight oil production can rise to around 3m b/d in 2020.
Many oil exporters now fear that this sharp increase in new production capacity worldwide may outmatch new and more expensive oil production projects in areas such as the Norwegian continental shelf, Russia, Artic areas and ultra-deepwater projects. A large expansion of cheaper onshore tight oil production can curb the activity level in the offshore oil industry, reduce revenues to the offshore oil sector and state revenues for oil exporters such as Norway and Russia.
But is intensified competition on the supply side really what Norwegian oil producers and other net oil exporters should be most worried about in the long run? Are the changes in consumers’ choice of energy source that have been triggered by the high oil prices not at least as challenging?
The strong oil price growth from 2003 to date combined with increased focus on the environment has triggered a process of changes on the demand side as well as the supply side; these changes may entail major challenges for the oil industry in the long run.
Higher oil prices have triggered the development of new technology that makes it possible to use other types of energy in areas that have previously been dominated by oil.
This is particularly important in the transport sector, which accounts for more than half of the global oil consumption and where oil-based fuels have been almost without competition. Lack of infrastructure such as filling stations and distribution systems for non-oil-based fuels, subsidised petrol and diesel prices in many countries and the absence of technologically competitive solutions for using non-oil-based fuels have made it difficult for non-oil-based fuels to penetrate the market. This has also meant only moderate changes in fuel consumption patterns, despite the sharp oil price rise.
But the oil market’s last defence may soon fall. Recent years’ strong oil price growth and growing focus on the environment have also forced the transport sector to develop more efficient fuel types and fuel solutions. Once a new competitive technology that uses other energy sources than oil has been developed, the sheltered position of oil in the transport market will be threatened. Technological advances cannot be reversed and this will affect the outlook for oil demand in the long term.
Of course, it will take time until the production and availability of new fuel types has any major impact on the fuel market. The more that prices of oil-based fuel are compared to other energy types, the more the innovation of new fuel types and engines will accelerate.
Global biofuel production has tripled since 2005, airlines are researching the possibility of using algae fuel, while competitive prices of natural gas, rising production of unconventional gas and an expansion of LNG capacity have boosted interest in gas also on the transport side.
Since 2009 natural gas prices have increased at a slower pace compared with oil prices, driven by growing production of non-conventional gas, such as shale gas/tight gas in North America, tight gas in Asia and coal-bed methane (CBM) in Australia. With the large, non-conventional gas reserves around the world and a significant rise in the number of LNG terminals, we expect that natural gas will capture a larger share of the total energy mix long term.
In January President Obama announced an initiative to upgrade the country’s truck fleet from diesel to natural gas. According to NGV Global the number of natural gas vehicles worldwide has more than tripled since 2005 (the last six years), albeit from very low levels. In 2011 this vehicle type accounted for only 1.2% of the global vehicle/car fleet.
Growth in number of Natural Gas Vehicles (NGV) in the world from 1991 to 2011
Norway has been in the forefront of developing the technology and putting LNG-fuelled ships into operation. According to Det Norske Veritas (DNV) a total of 29 natural gas vessels have been added to the fleet in Norway since 2000, and 28 new LNG vessels are expected before 2014. Now both the US and Canada are now picking up the trend. DNV expects 1,000 newbuildings to be fuelled by LNG within the next nine years if LNG prices remain low compared to oil prices.
LNG fuelled ships in operation worldwide (blue) and confirmed newbuilds (light blue)
Price trends for oil compared with other energy sources and the world’s focus on the environment will determine the pace at which oil will be challenged, also on the transport side. The development of new technology and new fuel types cannot be reversed – but a significant breakthrough in the international fuel market will depend on the price of competing products, environmental/transport policies, infrastructure expansion and economic trends.
In our view, new advances on the transport side may also be a more serious challenge for the oil sector and oil prices in the long term than harsher competition caused by an expansion of global production capacity. Increased production capacity and slightly lower oil prices will probably slow the pace and innovation of new fuel types on the transport side.