The oil and gas industries have recently had to deal with supply and pricing issues as a result of regional conflict, international financial crises and supply challenges.
However, these challenges are pale to the threat of renewables, which is aiming to take over the market.
What do the experts say?
According to market observers, renewables are being used as spring ward towards ousting conventional oil and gas sectors from their current hegemony.
Debating Europe, a platform tailored for expert discussions on several issues, quotes Hans Bruyninckx, Director of the European Environment Agency (EEA), as saying that relying on oil and other fossil fuels has geopolitical risks, as these resources often come from regions of the world that are not the most stable.
“When you think of price competitiveness, you have to take everything into account, and we know that oil and coal especially add to air pollution, which has a cost for our healthcare systems; they add to pollution in the environment, which makes the environment less productive, for example in agriculture; and there are other forms of energy, like nuclear, that have a high cost for society to deal with, such as waste,” he said.
Bruyninckx believes that renewable energy is already price competitive and is more a matter of incorporating all the said factors in setting the price of energy.
However, renewables will face headwind towards their takeover plans. Fatih Birol, Executive Director of the International Energy Agency (IEA), believes that cheap oil, gas, and coal prices are an important challenge for renewables, especially cheap gas and coal prices.
“This may very well complicate the strong growth of renewable energy, especially wind and solar power. But many governments committed to raising the share of renewables in the energy mix,” he said.
To begin with, which challenges does the oil industry have to deal with?
The EV threat
A recent report released by Bank of America Merrill Lynch’s (BofAML) says that oil has a 55 per cent of global consumption in transportation.
“Should EV (Electrical Vehicle) sales rise towards 50 per cent by 2050, total global oil demand would peak at ~105 mbpd by 2030. In this scenario, oil demand would decline by 0.1 per cent p.a. on average in 2030-50. If EV sales rise to 75 per cent by 2050, oil demand would peak by 2030 and then decline 0.2 per cent p.a. on average in 2030-50,” said the report by BofAML.
A September 2017 article by Reuters said that increasing efficiency of fossil-fuel-powered cars was a threat to gasoline demand, quoting an energy consultant as saying.
From 2016 to 2040, FGE, a global oil and gas consultancy, expects that savings on fuel consumption due to more efficiency means that 11mbpd will be removed from global gasoline consumption.
“Or more than twice the 5.3 mbpd cut by the addition of hybrid cars, plug-in hybrids and battery electric vehicles,” Reuters reported.
According to OilPrice.com, an industry platform, researchers project that solar power will become cheaper than conventional and fossil-fueled electric generating sources by 2020.
Meanwhile, Seeking Alpha, an analysis website for oil and stock market, reveals that solar energy is growing at a tremendous pace globally, with the demand growth even surprising the most optimistic analyst.
It says that the biggest reason behind the growth has been the sharp reduction in costs and prices, which made solar energy become cost-competitive with other energy sources in many parts of the world.
“Solar energy is already competitive with gas and coal in many regions. What will be even more concerning for coal and gas power plant owners is that solar energy costs will continue to decline at a rapid pace over the coming years,” it said.
The Gulf Organization for Research and Development reveals in a study for the International Renewable Energy Agency (IRENA) that close to 60 per cent of GCC’s surface area has excellent suitability for solar PV deployment.
It said that developing just 1 per cent of this area could create almost 470 gigawatts of additional power generation capacity making this field even more exciting.
What about gas?
Columnist Charles Ellinas believes that even though natural gas demand is forecast to continue its ascendancy over the next 20 to 30 years, supported by low cost and the drive for cleaner fuels, new evidence shows that it faces challenges from fast penetration of renewables and stubborn coal maintaining its role in power generation, particularly in Asia.
Ellinas says that even if renewables cannot yet transform the entire energy business, they are becoming very disruptive in global electricity markets.
He cites a 2017 report by IEA showing new records for renewable energy, which accounted for two-thirds of all global net electricity capacity growth in 2016, which is expected to increase further over the next five years.
He said that the cost of solar photovoltaics (PV) and onshore wind is now comparable or even lower than new-built fossil fuel alternatives. “This is attracting the interest of emerging economies, which are now looking at renewables as attractive options to sustain their development,” he said.
Using the US average for system size at 5 kW (5000 watts), a solar panel’s cost ranges between $10,045 and $13,475.
According to Ellinas, over the five-year forecast growth period in renewable, generation will be twice as large as that of gas and coal combined. Growth of natural gas in power generation remains anemic over the reference period, slower than that of coal; and the gap is widening.
Low LNG prices
According to Informa.com, a business intelligence group, the decline in oil prices and increased weakness in demand growth led to a fall in LNG prices. “Low prices cause buyers to wait and see hoping for even lower prices before signing long term contracts, a gambit that threatens developer’s FID decisions for new large scale LNG projects whilst current suppliers face lower revenues for their non-contracted supplies,” it said.
PointLogic Energy reveals that there are 999 wind-powered electric plants in the US, contributing to just six per cent of electricity generation last year.
It said that natural gas and coal still dominate, respectively with 33.8 per cent and 30.4 per cent of power in 2016, according to EIA. Solar and wind together still have less than 20 per cent of the pie, but renewables enjoy the fastest growth rate of adoption.
OilPrice.com emphasized the cost savings related to wind power, citing the example of a multi-state wind capacity project in the US announced by Xcel Energy and saying that it would save Xcel customers in the Midwest $7.9 billion over thirty years.
It also cited Moody’s Investor Services estimating the MW-hour cost of wind at around $20, while coal comes in at $30.
According to Wind Power Engineering Development, a power engineering company, the Middle East remains behind Africa in terms of wind power development. It only accounts for approximately 8.7% of total cumulative capacity in MEA by YE/2016. The remaining 91.3%, or 3.8 GW, was installed in Africa, led by South Africa, Morocco, and Egypt.
Nearly 40 GW of new wind-power capacity will be added in the Middle East and Africa region from 2017 to 2026, with a compounded annual growth rate of 22 %.
Technology deployment and talent recruitment
According to Strategy&, a consultancy company, oil and gas companies will need to examine the role that digital technologies can play in improving their performance.
“Digitization should be a lever for innovation that improves productivity and efficiency in the field. For instance, robotics are likely to become more commonplace in the industry, handling complex and repetitive tasks such as connecting pipes and replacing broken machinery, which in turn will reduce labor requirements,” it added.
Strategy& reveals that the human cost of restructuring within the oil and gas sector has been enormous.
It said that downsizing has deprived the industry of some of its smartest veteran talent, while scaring away new recruits.
It noted that oil and gas companies needed to engage with these recent graduates, because they can provide the new ideas that will make the future easier to navigate.
Taking these steps, oil and gas companies will be able to save money which can be used in R&D to remain competitive and relevant players in the face of stiff competition coming from technology driven renewable.