All claims to the contrary, the oil and gas industry is not dying a slow death, with the outlook for U.S. exports looking strong long term, according to one of the energy world’s leading thought leaders.
Master storyteller Daniel Yergin, more often the inquirer, had much to share with NGI in a recent conversation about the state of the oil and gas world, the transition to net-zero carbon and what may happen after the November elections.
Yergin is in the spotlight with the release of his newest book, “The New Map: Energy, Climate, and the Clash of Nations,” which arrived in September at a riveting time for the oil and gas world.
Energy fans perhaps came to know the energy chronicler from “The Prize: The Epic Quest for Oil, Money and Power,” a best seller that won a Pulitzer Prize for General Nonfiction in 1992. Yergin has now authored or co-authored eight books.
Yergin delivered his hand-penned book to Penguin Press in July, but there have been changes even since then, he said.
‘Turbulent New Era’
Yergin traces the pre-pandemic growth in his new book to the “shale revolution,” as the sharp growth in Lower 48 tight resource development has in only a few years’ time turned the country into a top oil and liquefied natural gas (LNG) exporter.
The turnaround, which caught fire by the mid-2000s, has since “transformed the American economy, ending the era of shortage but introducing a turbulent new era,” Yergin said. “Almost overnight, the United States has become the world’s No. 1 energy powerhouse.”
The role fossil fuels play in climate change, however, has challenged the world’s economy and is “accelerating a second energy revolution in search of a low-carbon future.”
This year, Covid-19 has shaken the economy to its foundations and has heralded an “economic dark age” that has made things “starker and more urgent.”
Against what would seem to be a rapid transition from fossil fuels, Yergin said “oil will maintain a preeminent position as a global commodity, still the primary fuel that makes the world go round.”
The continued use of fossil fuels boils down to “the reality of all the investment already made, lead times for new investment and innovation, supply chains” and oil’s “central role in transportation, the need for plastics…and the way the physical world is organized.”
The original idea for “The New Map,” said Yergin, “was how the map of North America to global energy was being changed by shale work. Initially, it was where gas was flowing, and of course, the growth of LNG. And then it was about shale oil, oilsands. It went from being a literal interpretation about the map to being a metaphor for how the world of energy and geopolitics are changing.”
Pioneering Barnett Shale explorer George P. Mitchell, considered the founding father of the shale revolution, successfully combined the use of hydraulic fracturing with horizontal drilling. Mitchell created the “major disruptive technology, but I think its impact has actually been greater than that.”
The ability to draw out substantial tight oil and gas resources has “not only changed the whole supply outlook dramatically, but it’s led to creating production factories in the U.S. It’s a big job creator…It’s been a huge contributor to energy security…It’s created a big change in U.S. foreign policy, giving the U.S. flexibility…It’s been the star of the biggest technological innovation of the century, but its impact goes well beyond energy.”
The remarkable innovations have led to a dark side, as “growth is no longer enough,” Yergin noted in his new book. “The investors who had previously cheered on the companies as they strove for ever-higher production now soured on them. The companies, improving their efficiency, had cut the cost of a well from perhaps $15 million to $7 million, but that was not enough.” The need to reduce costs has set in motion consolidation and mergers as investors want to see financial returns.
Finding export markets has created another avenue of growth. By last February, the United States had hit its highest oil production level ever at 13 million b/d, above the output of Saudi Arabia or Russia and almost tripling the level of 2008, Yergin noted.
And then the bottom fell out, the “calamity of 2020,” as the pandemic shut down the world economy, “which slammed shale as it did most industries.”
The sharp decline in investments today means unconventional output is destined to “go in reverse and decline,” with slower growth once it returns. Still no matter the trajectory, “shale is now established as a formidable resource,” Yergin said.
The disruptive drilling techniques have to date not reached far beyond North America. Pre-pandemic, Argentina’s Vaca Muerta formation brought a horde of energy admirers eager to tap the vast formation.
There are two other countries where unconventional drilling is “taking off,” Yergin said.
“One is China, which has made some advances in shale, but it’s small. And the other country, which will surprise people, is Saudi Arabia.”
The long-time oil leader now is pouring resources into natural gas generation to free up more oil for export. State-owned Saudi Arabia Oil Co., aka Aramco, has “studied very carefully how shale was developed in the United States,” Yergin said. “They sought to apply those techniques to a different kind of organization to produce it.”
Still, while there are tight oil and gas seams around the world, the “early notions that shale technology would be helpful in Eastern Europe and Poland and Ukraine can’t happen for geologic reasons but also aboveground reasons,” Yergin said. A lack of infrastructure and unfriendly regulatory regimes stand in the way.
Lower 48 producers are banking on the ability to extend their LNG export reach, but the pandemic has destroyed demand, and with it, the ability to fetch higher prices.
Still, “even with the slowdown this year,” Yergin said LNG demand is expected to grow by 2% of gross domestic product this year, “assisted by weak prices.” Yes, LNG demand is low, but it’s no different than the downturn for other energy sources.
“We cannot escape the virus. But LNG is going to be a growth business for some time to come.
There may be more supply than there is a market, but there will be the big three: U.S., Australia and Qatar.”
Keep an eye on Russia to bring more muscle into LNG exports too.
“People haven’t focused on Russia, which has cracked the nut” on LNG exports, he said. “So it will be a competitive market, but I think on average, even with more efficiency and renewables, LNG is cheaper. And in 2040, it will grow at an average rate of around 3%.”
Love Me Or Leave Me?
The world may appear to be on a fast track to ditch oil and gas, but it’s not going to happen anytime soon, said Yergin.
Huge commitments to transition from fossil fuels to renewables have been made by the European majors that include BP plc, Equinor SA, Royal Dutch Shell plc and Total SE. It’s doubtful, however, that U.S. majors ExxonMobil or Chevron Corp. nor any of the large independents will be under as much pressure to reduce their oil and gas output.
“The European majors are under enormous pressure from governments, from some investors. And I think they’re responding to the activists,” Yergin said. “The impact of the Paris climate agreement is much stronger in Europe than in the United States. So, I think they’re adjusting to the reality of the world in which they live…”
The U.S. operators instead “are concentrating on becoming really efficient in the oil and gas business. In addition, if they want to add wind or solar, they can add a wind or solar company.”
Domestic producers “got in and out” of the renewables businesses long ago, and they provided much of the research and technologies touted today in the transition to lower carbon options.
“People are surprised when you tell them that one of the two pioneers of solar photovoltaic was Exxon, which started one of the first two companies in the 1970s,” Yergin noted. The lithium ion battery also was originally developed by ExxonMobil in the ‘70s.
With a plethora of supply across the Lower 48, the majors remain focused on their “core business rather than trying to move out of their core business.”
A recent survey of oil and gas executives by the Federal Reserve Bank of Dallas found that most think U.S. oil demand may have peaked. That may be true in the United States “but not in most of the world,” Yergin said.
Energy demand overall is depressed, “but I think that I would be cautious about generalizing this Covid crisis as to what the future demand will look like. It will depend upon what kind of economic recovery we have.”
Once worries about the pandemic ease and people feel more confident about air travel, visiting friends and staying away from home, it may be a much different story. Yergin recounted that in his first book, “a great economist expected we were going to have this huge return to the Depression after World War II. Instead, we had high economic growth because of pent-up demand. And I think that’s where it is going to go. I think there could be a lot of pent-up demand to travel, for many other things, when the crisis is passed.”
In an address in September to the United Nations (UN) General Assembly, Chinese President Xi Jinping said the global climate accord reached in late 2015, aka the Paris agreement, had charted “the course for the world to transition to green and low-carbon development.”
To “honor this agreement,” China is targeting peak carbon dioxide (CO2) emissions by 2030 and carbon neutrality by 2060. The question is, can the world’s fastest growing economy meet those ambitious targets?
“You know, it is quite a stretch,” Yergin said. “Let me put it this way: 2060 is pretty far away…And you know, China is kind of a split story. It has the world’s largest wind and solar resources, but it’s also adding coal-fired plants. So 2060 gives them a lot of elbow room…China has about twice as much CO2 as the United States does. So they have a long road to go. The government has a lot of levers to pull to make it happen, but at the same time not to sacrifice economic growth.”
Was Xi’s call to participate in the Paris Agreement a bit of gamesmanship with the Trump administration, which has pulled the United States from the voluntary agreement?
“I think it’s a pretty good point. I think that it was a point-counterpoint to the UN General Assembly. And I think the Chinese wanted to come and make a big, popular public statement, and that was what resonated. Trump had attacked China in his speech at the UN. The consequences of the coronavirus is making relations between the U.S. and China worse.”
Through 2019, U.S. natural gas exports to Mexico were more than all LNG exports combined, Yergin noted. The United States was delivering 60% of Mexico’s total gas supply and 65% of its gasoline, making over the “new map of North American energy integration.”
While Mexico holds some of the biggest oil reserves in the world, output has continued to slide.
President Andrés Manuel López Obrador is now threatening to undo the energy reform that has allowed private operators to help develop oil and gas. In September, AMLO as he is known said the government would continue to respect oil and gas laws, as well as existing contracts.
However, if he is unable to “rescue” troubled national oil company Petróleos Mexicanos (Pemex) and state electricity firm Comisión Federal de Electricidad (CFE), the administration could push to reform the Constitution to undo the energy reform.
How reliable are AMLO’s threats? Mexico’s president, Yergin said, “has a very 1970s view about energy. That’s when his opinions were shaped. And the world’s changed a lot. Mexico’s foreign investment in technology should be integrated into the global market to meet key energy to Mexico.
“Mexico has the capacity to have a major manufacturing platform, but it needs reliable energy and reasonably priced energy.”
For AMLO, “the nationalization of Pemex in 1938 was one of the greatest of Mexican history.” The president’s “political objectives” differ from “Mexico’s economic objectives.”
For the president, “Pemex and its nationalization are the great symbols of national identity,” Yergin said. AMLO “wants to restore Pemex, the most indebted company in Latin America, as the monopolistic national champion…Yet, despite his animus toward energy integration, AMLO cannot escape the reality of the shale revolution.”
There are 17 pipelines now crossing the U.S.-Mexico border, “with more to come,” Yergin noted. “This means that Mexicans will continue to use U.S. natural gas to generate growing amounts of new electricity, even as AMLO seeks to return to a past when Mexico was more isolated from the global economy.”
The Great Transitioning
As to the next big thing for the energy sector, some things are a given but there could be some surprises. The shale revolution came out of nowhere, Yergin noted. “Nobody really foresaw shale and the impact with our shale revolution.”
Since then, there have been other mini revolutions, such as the one for solar, “in terms of solar costs coming down so dramatically.” Next-generation nuclear energy also may “surprise people.” Battery technology also is getting better. In addition, research continues on ways to integrate wind and solar generation to make its use predictable rather than only using it as an intermittent source.
In addition, “carbon capture is absolutely a necessity,” Yergin said. “There’s no way to get close at all without carbon capture because gas will continue as an important, major part of the energy mix.”
As to the latest energy du jour, hydrogen, everybody wants to know where it’s going, Yergin said. In the not-so-distant past, hydrogen “was very peripheral. But over a period of four years, it’s not at center court but it’s certainly another frontrunner…I think companies are very seriously looking at it as being part of the energy mix…It could be something well suited to oil and gas companies,” particularly for their refining operations…I think the European majors in particular are very motivated to see what they can do with it…”
Yergin is not prone to offering his take on elections, including the upcoming U.S. presidential race. A few things, however, are predictable.
For example, if President Trump is reelected, his second term “would look very much like the first,” Yergin said. “I think it would be a continuation,” as he works to reduce a “mountain” of regulations and open up more areas to energy development.
Democratic nominee Joseph R. Biden Jr.’s election could usher in an ambitious “$2 trillion climate program that would really seek to push renewables, push electric vehicles and so forth.”
However, Yergin said the president in 2021 is going to face many pressing issues, “given how much money has to go to really rescuing the economy.”
If Biden is the president, he may be “stuck on a bad track, but there are other things he can do. I think certainly there would be more regulation,” and that’s where his policies would be centered. There may be “a lot of battling and maneuvering going on” in regards to how much energy development could be stifled. “I don’t think it’s sorted out.”
Yergin dismissed a call on why any administration would move to end developing oil and gas on federal lands, as the federal government owns about 48% of the western United States.
“Why is it bad to develop oil and gas development on this land if it’s not the beautiful national parks and so forth? There is a lot of land that could safely be developed for energy resources…I don’t hear a very good answer for it.”
Worries about Biden overreacting and halting development may be overstated, however. The former senator and vice president knows the ways of the world. He formerly chaired the Senate Foreign Relations Committee and understands that the United States has to develop its resources or potentially have to rely on imports from unpredictable partners.
“You know, people forget that orientation” about Biden, Yergin said. “I don’t think he would want to be president and preside over a really rapid increase in U.S. oil imports.”
Yergin said he had no doubt that Biden would immediately rejoin the UN climate accord. “I mean, there’s some things that will happen automatically, but he would have a lot of other issues that he had to deal with at the same time.”
Now the author of four books and co-author of four more, Yergin is taking a break from writing but not from energy. CERAWeek, which he chairs, annually draws thousands to Houston. This year, it was canceled only one week before it was set to begin because of the coronavirus.
Look for CERAWeek 2021 to be virtual. However, the virus should be under control and vaccines available in 2022. By then, “we’re quite confident” that CERAWeek will be in person.
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