Following years of record commodity prices and profits, the oil and natural gas industry is now traveling a bumpy road. The U.S. economy is weaker, the public's climate change fears are high, access to reserves is tighter, output is lower and the workforce is smaller and getting older. For a smoother ride, energy executives urged their peers last week to invest in technology, build on efficiency measures and begin partnering with stakeholders around the world.
The oil and gas industry overall faces a "tyranny of large numbers," said Cambridge Energy Research Associates (CERA) Chairman Daniel Yergin. His company hosted its 27th CERAWeek in Houston, and the nearly 2,000 attendees were pressed to consider a "new" energy future.
"For the last half decade, we've been in a very high-growth global economy, and that has been the No. 1 driver of energy prices," Yergin said. "The degree of a downturn will change the equation."
The U.S. recession's increasing likelihood isn't the only issue on the minds of energy leaders. Hess Corp. CEO John Hess doesn't think producers are spending enough or are prepared for the looming energy problems he expects to see over the next decade.
"An oil crisis is coming in the next 10 years," Hess warned. "It is not a matter of demand, it is not a matter of supply. It is both."
Ten years ago, said Hess, "we were fighting for survival. Oil was priced at $10 a barrel or so...all we could do was ride out the storm. Ten years later we are in uncharted waters. We have $100 a barrel crude but less access to resources, people are increasingly limited, and we have supply capacity issues. We have moved in the last 10 years from a supply-led market to a demand-led market. It's hard to see any relief in sight. The industry needs five- to 10-year lead times [to find and develop resources] and oil prices are coming down sooner than most people think. We need to act now. Unfortunately, we are acting as if we don't know we have a serious problem."
The changes within the industry are mind-boggling.
"The challenge of oil supply is that the discoveries are smaller and in more difficult environments, such as the deepwater Gulf of Mexico, Brazil, South Africa, Hess said. "We are searching for targets that are more than 30,000 feet deep. Such a number was unimaginable 10 years ago. Yet while the recent discoveries are promising, we need to find new production provinces...like the Alaska North Slope...every year just to support production for future generations...And we stopped making these types of discoveries in the late 1990s. U.S. production peaked in the 1970s...
"These are the challenges we face. First, in terms of demand, we need significant progress in conservation. We need more money on research to make more efficient vehicles...Another critical challenge is climate change...and the U.S. needs to set an example," said Hess. His comments mirrored those of ConocoPhillips CEO Jim Mulva, who also spoke at CERAWeek (see related story).
Hess was not optimistic about whether producers could keep up with global demand.
"We are far below what is needed to ensure sufficient production for the future," Hess said. "With oil demand growing each year, global crude oil will fall short of demand between 2015 and 2020. I do not see how we will meet this projection."
Although some policymakers and the public may believe it, alternative energy is not a near-term solution, said executives.
Saudi Arabian Oil Co. CEO Abdalla Jum'ah told executives that alternative energy "in my view...offers only part of the solution. As any Texas cowpuncher will tell you, the best way to clear brush is to remove it, root and branch, not just trim the leaves. That is to say that if we could proactively address the fundamental challenges of energy, most would diminish in relevance and in some cases dissipate all together.
"If we are serious about this issue to become more effective for the long term, surely we should be addressing the root causes of supply concerns...target the root causes of our energy problems rather than battling with manifestations of the many heads of the hydra...In my opinion the world simply cannot afford to leave massive amounts of coal and oil and gas in the ground and move precipitously toward unproven technologies."
Between conventional and unconventional oil and gas liquids, "the planet is sufficiently endowed to meet the world's demands for many decades to come," he said. However, concern about climate change could lead "key players to scatter based on varying agendas." Instead, he urged the world's producers to work together to solve energy shortfalls and looming climate change issues.
"We need the whole world to arrive at greater clarity at what it wants to produce a future energy mix," said Jum'ah. "Fossil fuels will continue to dominate for the near future," and he predicted that oil and gas would account for 82% of global energy consumption by the end of 2030. "We are not putting our heads in the sand. We are up, we are open and we are saying fossil fuels are needed and we must find a solution to the problems emanating from these fossil fuels."
An international commitment is needed to develop technology and standards for carbon sequestration from stationary and mobile sources, Jum'ah said. To do that, policymakers and other key negotiators have "to quit working at cross-purposes."
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