Strategic Update: The Future of Energy

The global oil industry is coming under pressure from advances in technology and government policies reacting to climate change – but don’t write off fossil fuels just yet. Oil demand will continue to grow – albeit at a slower pace – and creeping costs will lead to price inflation in 2017, according to industry experts at the Future of Energy session.

“Hydrocarbon resources will be with us for decades,” said Amin Nasser, Chief Executive Officer of Saudi Aramco, adding that “renewables should not deter us from investing in oil”. His position was mirrored by Fatih Birol, Director of the International Energy Agency, who pointed out that investment in the oil industry has, for the first time, declined for two consecutive years. Without new investment in oil, we may see a “significant gap between consumption and production” – a gap which shale and renewables cannot cover.

Meanwhile, oil production in the United States leaped from 5 million to 9 million barrels per day under the Obama administration. When OPEC cut prices in 2014 it was targeting the US as high price producers, said Kenneth Hersh, Chairman of NGP Energy Capital Management. But US producers adapted to the low price environment, creating a resilience not seen before in the industry. “OPEC took on the US and lost,” said Hersh. The oil market is no longer an OPEC cartel – of the 22 countries that cut oil prices, only 10 were OPEC members, he added. “I’m bullish about low cost oil and gas producers.”

But what about the rise of renewables? Electric cars are set to mushroom from 1.2 million vehicles today to about 150 million by 2040 – but that’s still only 8% of the light-vehicle sector. The oil industry is driven more by petrochemicals, heavy vehicles and engineering. Asian trucks alone drive one third of global oil demand growth. Meanwhile, coal remains a big part of the energy mix in India, the US and China.

However, China is rapidly diversifying out of fossil fuels. Although over two thirds of China’s energy mix is from thermal power, that percentage is going down every year. China now leads the world in installed hydro-electric and wind power capacity, with further investments in biomass, geothermal and tidal power generation. China’s 13th Five-Year Plan – its latest national development programme – has enshrined energy efficiencies, emissions reductions and green development as core national priorities. Furthermore, the Chinese government’s stance on climate change and implementing the Paris Agreement is “unwavering and very firm”, according to Qiao Baoping, Chairman of the China Guodian Corporation, one of the world’s biggest power producers.

What’s most striking is the speed of change – three years ago, no one predicted that China would be at the forefront of renewables, yet it is now leading that transformation, said Francesco Starace, Chief Executive Officer of Enel, an Italian multinational power distributor. In 2017, 70% of China’s energy investments are in renewables. “We need to spread a consciousness of new energy sources,” Qiao said, adding that if all 1.4 billion Chinese people change their behaviour and reduce their energy usage, “that adds up to a lot of progress”. But in a call for global cooperation on transforming the energy mix towards renewables, Qiao concluded: “No country can carry the baton for the whole world. We have to come together and all do our bit.”