Hydrocarbon Industry in Denial?
Could the hydrocarbon industry be in denial?
It is interesting to note that many in the industry seem to believe there is an inevitability that coal, gas, and oil demand and prices and will recover to levels that make exploration and production of hydrocarbon based energy resources viable again.
However, if you take a step back to look what has been happening over the last few years you see an alternative scenario unfolding:
Firstly, we have now seen global political agreement on the need to take measures to limit climate change. Report after report shows that if this is followed through then we will leave at least 40% of the world's hydrocarbon reserves underground since we cannot afford to release the CO2 from their combustion. So exploration looks a very poor investment when we have already found more than we need. And on the production front only the lowest cost production sites have a chance of getting to market. This is hardly a world conducive to high coal, oil, and gas prices.
Secondly, Ambrose Evans-Pritchard in the Telegraph showed how even the International Energy Agency (IEA) managed to vastly underestimate the growth of solar power. Solar and Wind power infrastructure is now in place and growing rapidly. In Power Generation the lowest marginal cost generator is always called on before higher marginal cost options. Solar and Wind have approximately zero marginal cost so will always displace hydrocarbons when the sun is shining or the wind is blowing. As renewables infrastructure grows hydrocarbon gets displaced more and more.
Thirdly, there is the final piece in the jigsaw for the end of the hydrocarbon era - batteries and EV's (electric vehicles). A recent report by Bloomberg looks at current growth rates in EV's, current decline rates in battery costs, and concludes that not only will transport move much more rapidly to EV's than predicted by the oil industry ( with a minimum of a third of all new vehicles being EV by 2040) but that the associated developments in battery technology, dramatically reducing the cost of energy storage, will themselves transform the solar and wind industries such that renewable energy is also available when the sun is not shining and the wind not blowing.
Finally, there is China with a lower than previous, but still highly positive economic growth rate. Demand for energy will grow in China but they have already announced that they will be closing coal plant and switching to alternatives, as they continue with the largest renewables and nuclear new build programmes in the world. China is short of oil reserves and will not want to become import dependent for its transportation fuel needs. With the largest installed base of electric vehicles today (albeit electric bikes rather than cars) and a politically damaging urban air quality problem China is a prime candidate for an electric vehicle future.
So reality of the past few years would indicate that we are in the throes of a transformation from the high-hydrocarbon to the low-hydrocarbon era.
Energy companies which are not at least hedging their bets may well be surprised by the speed at which their very existence is threatened. Shareholders in hydrocarbon companies should be wary and demand that management be mindful of the alternative, low hydrocarbon future that now appears to be unfolding.