Write a report showing the main components of this reassessment, risks and opportunities for the future dynamics of the world oil and gas industry?
Petroleum has always played a crucial role in bringing about growth in the world economy thereby enhancing the life of the societies around the world. The potential of the oil and gas industry to expand in the near future is diverse and can be contributed the changing dynamics of this important sector. There are four global trends that are identified by the Oil and the Gas industry.
Demographics- the course of the world population is forecasted to reach to 8 billion by 2030 and will touch the line of 9 billion in 2050. The population growth is considered to be concentrated mostly in the developing countries. Also the characteristics of the population include the ageing population in the developed countries and the young population in the developing countries.
Globalization and the GDP growth disparity- with the advent of globalization the demand for the resources would blow up for the developing nations which will be accompanied by a shift in the geo-political landscape. The forecast for the GDP per capita is about triple the current rate by 2030 in China and India which will eventually driving the requirement for oil and gas coupled with the growing population of about 2.5 billion.
Energy Consumption- following the recent trajectory then the demand for energy must be doubled by the year 2050. The demand for the energy is expected to rise by 40% by the year 2030 and reach 16.6 billion tones of oil equivalent per year. This energy demand is mainly from the Non- OECD countries like China and India. This increase in demand from China and India is accounted to be about 95%.(Bildirici and Bakirtas, 2014)
Climate change and Sustainability- the increase in demand for energy will cause certain environmental hazards like air pollution and water pollution. So the world will take measures to form a green economy and force the world to adopt the approach of ‘earth friendly’ solutions that would also help the world to reduce the greenhouse gas emission like carbon dioxide and other harmful particles.
In the edition of the International Energy Outlook 2014, the US Energy Information Administration anticipated that consumption of the world fuel liquid fuels would rise by 38% by the year 2040. It is quite evident from the oil and gas market that it has experienced a period of dynamic changes in its demand and supply. The increased demand for liquid fuels from China, India and the Middle East nations would acquire the share of about 85% of the total increase in liquid fuels over the year. The consumption of the liquid fuels will soon stabilize and can even fall in areas that have depicted the peak in their oil status and acquired a lion’s share over the years. (Campbell, 2012)These countries that can experience a decline in the consumption are US, Europe and Japan. This does not necessarily reflect that the fall in the consumption of liquid fuels in the powerful nations will suppress the consumption globally because the emerging nations like China, India and the Middle East will eventually contribute to the rise in the global consumption. The US Energy Information Administration has expected a downfall in consumption of liquid fuels in the most developed economies whereas it is forecasted that the developing countries will boost the consumption level by 9%.
The demand for the world liquid fuels use is expected to rise to 119 million barrels per day (MMbbl/d) in 2040 from the 87 MMbbl/d in the year 2010. With the excess demand from China, India and the Middle East nations, the price of the oil has risen and remained at a sustained level. This sustained rise in the oil price on the other hand had reduced the efficiency, switching of the fuels and even sowed the growth of liquid fuels use among the other old and mature oil consuming countries. Around 72% of the total increase in demand for the liquid fuels has been attributed to the nations like China and India and around 13% increase is accounted by the Middle East Countries.
Now the International Energy Agency (IEA) and British Petroleum (BP) anticipated that the US would become energy independent by the year 2035. (Eia.gov, 2015) It is not predicted that the US will not stop importing power overnight but would maintain a high level of self sufficiency and also for the rest of the world. In 2013, the oil import of the US was about $300 billion. This huge oil import contributed about two thirds of the annual trade deficit of the country. Thus, billions of dollars are being extracted from the country. The continued trade deficit in the US would overturn economic growth, the manufacturing sector and even the employment scenario in the country. There are several components for the reassessment of the oil market in the country. If the US become self sufficient in energy, then it would be able to spend less on cheaper, domestically generated power which will benefit the US-owned energy producers. (Deloitte.wsj.com, 2015)
Oil imports of the US contribute about 2% to the economic growth and assuming that the average growth in the economy is about 2%, it implies that a year’s growth will be free. But considering the fact that the US would become energy independent, this would boost growth in the US by ending the oil import, which is quite significant in nature. The reassessment of the energy market in the US could be established by cheap and abundant shale oil and gas which would enhance the US manufacturing sector. The energy prices of the US are lower than the prices in Europe and Japan and combining with the rising wages in China and increasing productivity of the factories of the US, a lot of firms in the US are engaging in reshoring that is restoring and setting back the production unit in the home country(Kelly-Detwiler, 2015). For example companies such as General Electric and Ford and Caterpillar had decided to make investment in new plants or factories that were previously shutdown. Apple previously closed a US plant has now declared to establish a new factory in Arizona. The improvement in the US manufacturing sector would uplift the overall economic growth. In fact the improved performance of the US is attributed to the cheap energy in the country. (Denverpost.com, 2015)
In this regard, the reassessment of the economy of Europe is recognized. The gas price in Europe was almost similar to that of the US for the past four years. It is expected by the Boston Consulting that the US would possess an export cost advantage ranging between 5% and 25% over Germany, Italy, France, the UK and Japan in industries like plastics, rubbers, machinery, computers and electronic goods. It is also believed that many European companies are also planning to invest in the US. In this context, Royal Dutch Shell has declared to set a new chemical plant in Appalachia. The government of Europe is aware that to maintain jobs and factories in Europe, it is required to maintain sustainability and affordability of energy. It is viewed that the foreign competition makes it difficult for the domestic industries to survive as they pay about half the price for electricity like he case in the US. (Europe facing peak oil, 2015)
The oil is exported to the US by many countries to the US but if the country achieved energy independence then the exports to the US would stop which would affect South America, Africa and the Middle East significantly. Canada is regarded as one of the world’s economic powerhouses which would also be affected by this movement. The main concern is not on the ending of exports to the US, rather that the oil prices would inevitably decline if he US stopped importing oil. This is because the US is so far the biggest oil importer of the world. The decline in the price of oil would impact the other oil producers and also the huge exporters to the US. The immediate impact of this change would cause a transfer of wealth to the consumer countries from the producer countries. The oil is considered to be the most important aspect of interest of the US which implies that the movement in the oil and gas industry would influence the foreign policy of the US. In this regard the US is concerned about the stability in the area mainly around the border countries like Russia and China and also maintains the image of the global superpower. The US is also concerned with the defence contract and Saudi Arabia. It is also argues that the US has plans to withdraw its overseas interests. (Anderson, 2015)
There are generally five risk associated with the future path of the oil and gas industry. The first is the political risk which occurs when the oil and gas companies are involved internationally as the laws and rules are different across countries. The next is the geological risk which refers to the difficulty in extraction and accessibility to the natural reserves. The price risk is also another risk that is the primary factor of the movements in the oil and gas industry. It is generally considered that the more the geological barriers to easy extraction, the more is the price risk. Supply and Demand risk is an important risk for the oil and gas companies. (Srr.com, 2015) Recently, the demand for liquid fuels has increased but the new supplies of oil from shale resources have brought about positive outlook. But with the demographic issue, the supplies are not able to meet the increased demand which resulted in the rise in oil prices. Lastly, the cost risks are the major risk faced by the oil and gas industry. The more restricting regulation and difficulty in drilling, the more expensive the project will be. (GAS AND POWER: Russia finds new way to bring gas to Europe, 2012)
The volatility in the future oil price reveals that it will be around $80-$100 a barrel. It is also expected by the Deutsche Bank that the on an average the Brent Crude price would be around $89 to $90 per barrel up to 2018. But this decline in oil price is regarded to be temporary but during this course, the OPEC member countries will be hampered by such low price. The burgeoning challenge n 2015 is ensuring a robust supply chain. (GLOBAL TRENDS IN OIL & GAS MARKETS TO 2025, 2014) The future challenges and risks that the oil and the gas industry would face includes low energy prices which would affect the investment especially on the capital intensive developments, technological revolution like digital oilfield and 4D Seismic Technology, labour challenges like increase in the wage and etc. (Miller and Sorrell, 2013)
There are several opportunities in the future of the oil and gas industry. According to a special report by the IEA, about 30% of the global oil and gas discoveries were commenced in the Sub-Saharan Africa which implies that the opportunity that the oil and gas industry is waiting to grasp is crucial to meet the increasing demand globally. It is learnt that Africa has the potential to emerge as the hotspot for exploration offshore (deepwater production). Another opportunity that is identified is the Mexican laws that was recently passed by the government states that foreign and domestic energy companies have the right to explore, produce and refine oil. (Navigating geopolitics in oil and gas, 2015)The deepwater would attract foreign companies to invest but it is also required to be careful as the deepwater exploration is risky, capital intensive and technologically challenged. In this case, an appropriate fiscal reform and regime and robust oil price investment needs to be implemented. The deepwater exploration provides opportunities for the deepwater supply chain. (Greencarcongress.com, 2015)
The most dynamic and complex industry in the world is the oil and gas industry. Energy is regarded to be the pivot of economic prosperity and removing poverty. Till now the offshore oil and gas industry was more worried with the declining oil prices which dropped by 27% a barrel but the thriving issue of the current times is ensuring stability of the oil price in the future along with the cost related to the exploration and production. (Vandenbussche, Thylander and Millet, 2014) With the emerging economies like China, India and the Middle East, the increased demand has altered the direction of the industry. The challenges and the opportunities of the oil and gas industry can be answered by technological improvement, substantial capital investment and the talent management. Thus, the oil and gas industry plays a crucial role in the future and impact the economies on a worldwide basis. (Offshore-technology.com, 2015)
References
Anderson, R. (2015). How American energy independence could change the world. BBC News. [online] Available at: https://www.bbc.com/news/business-23151813 [Accessed 6 Apr. 2015].
Bildirici, M. and Bakirtas, T. (2014). The relationship among oil, natural gas and coal consumption and economic growth in BRICTS (Brazil, Russian, India, China, Turkey and South Africa) countries.Energy, 65, pp.134-144.
Campbell, C. (2012). Recognition of peak oil. WENE, 1(1), pp.114-117.
Deloitte.wsj.com, (2015). Oil and Gas Industry: 2014 Outlook – Deloitte Risk & Compliance – WSJ. [online] Available at: https://deloitte.wsj.com/riskandcompliance/2014/02/04/oil-and-gas-industry-2014-outlook/ [Accessed 6 Apr. 2015].
Denverpost.com, (2015). The global impact of U.S. oil and gas development. [online] Available at: https://www.denverpost.com/ci_23921439/global-impact-u-s-oil-and-gas-development [Accessed 6 Apr. 2015].
Eia.gov, (2015). Press Room – Press Releases – U.S. Energy Information Administration (EIA). [online] Available at: https://www.eia.gov/pressroom/releases/press412.cfm [Accessed 6 Apr. 2015].
Europe facing peak oil. (2015). 1st ed. [ebook] Available at: https://www.greens-efa.eu/fileadmin/dam/Documents/Publications/PIC%20petrolier_EN_lowres.pdf [Accessed 6 Apr. 2015].
GAS AND POWER: Russia finds new way to bring gas to Europe. (2012). Oil and Energy Trends, 37(2), pp.7-8.
GLOBAL TRENDS IN OIL & GAS MARKETS TO 2025. (2014). 1st ed. [ebook] LUKOIL. Available at: https://www.lukoil.com/materials/doc/documents/Global_trends_to_2025.pdf [Accessed 6 Apr. 2015].
Greencarcongress.com, (2015). Green Car Congress: September 2014. [online] Available at: https://www.greencarcongress.com/2014/09/page/18/ [Accessed 6 Apr. 2015].
Kelly-Detwiler, P. (2015). No Impact of Oil-Price Collapse on US Power Markets. Natural Gas & Electricity, 31(9), pp.29-32.
Miller, R. and Sorrell, S. (2013). The future of oil supply. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 372(2006), pp.20130179-20130179.
Navigating geopolitics in oil and gas. (2015). 1st ed. [ebook] Available at: https://www.ey.com/Publication/vwLUAssets/EY-navigating-geopolitics-in-oil-andp-gas/$FILE/EY-navigating-geopolitics-in-oil-andp-gas.pdf [Accessed 6 Apr. 2015].
Offshore-technology.com, (2015). Future outlook: the offshore oil & gas industry in 2015 – Offshore Technology. [online] Available at: https://www.offshore-technology.com/features/featurefuture-outlook-the-offshore-oil-gas-industry-in-2015-4443293/ [Accessed 6 Apr. 2015].
Srr.com, (2015). Trends and Challenges for the Oil and Gas Industry | Stout Risius Ross. [online] Available at: https://www.srr.com/article/trends-and-challenges-oil-and-gas-industry [Accessed 6 Apr. 2015].
Vandenbussche, V., Thylander, E. and Millet, D. (2014). Best Available Techniques Applied to the Offshore Oil and Gas Industry. International Oil Spill Conference Proceedings, 2014(1), pp.388-399.
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