A Yuletide review of energy

Yule means wheel and the mid-winter start of a new cycle. 2016 is drawing to a close and energy markets approach normalcy again. After a tumultuous period of contracting business it is therefore natural to reflect on recent events and industry outlook. Importantly, the worst seems to be behind us.

In Energy Perspectives’ view, a crude oil price for the next decade of 60-70 USD/Bbl combines good resource management and long-term revenue protection. For Europe, the corresponding natural gas price will be just around 7 USD/MMBtu; higher in Asia and lower in the US, both with more volatility than the European price. Importantly this gas price level also gives persistent strong pressure on weakened coal, and high-efficiency natural gas power plants are increasingly likely to be in merit.

Given the supply overhang from the past boom decade, along with cost adaptation and technology dissemination, the oil supply is likely to be robust and price volatility relatively low. Barring force majeure, 27% volatility may be a good upper end. This resembles the situation in the early 1990s.

Importantly, I think the price levels are in producers’ long-term interest and contribute to stability. This is presumably also what core OPEC members see. As energy companies recover and consolidate, an oil price around 60 USD/Bbl is likely to emerge as their activity planning and investment price base. Is it not nice to settle the price questions this easily?

Joke aside, the price question should not mask strategic challenges ahead. Business challenges are still enormous even with price recovery, and the new relative stability does not suppress the deep paradigmic questions facing the energy industry. Is it safe to invest money in oil as we move towards a carbon-neutral world 2050? Or alternatively, can we assume that the climate hysteria and policy commitments will vaporize?

Population growth, urbanization and local environmental issues drive energy policy and technology. Time after time, across the globe as industrialization spread, people have required livable, clean cities. In this perspective, clean energy and frugality are not ideology, but simply dominant business strategies, enabled by a wave of radical innovations and new alternatives that lead to practical policy and restructuring.

The old continent, Europe, is probably the richest source of examples of the transition challenges modern energy companies face: Commoditization of transport and distribution. Declining base-load demand. Independence and autarchy. Origination and bespoke supply. Reintegration. But also rewards from customer partnership “unpolluted” by price, while accepting the attractiveness and surprising competitiveness of renewable energy. In spite of the appeal of the idea, energy autarchy is only an option for a few.

The Blue Ocean, “creative destruction” of the European energy industry is happening at a pace and depth that is mind-boggling, and unthinkable 15 years ago. Few of the big mid-stream names of yore remain. The coming years will most likely see this trend extend globally. New upstream partnerships and realignments are also appearing, mirroring parallel restructuring in the late 1990s. LNG is one of the current drivers, and a key focus area. While India seems to always battle, growing Africa remains a major growth area on a shrinking list of places for traditional energy business models.

Remarkably, however, an oil price level of 60-70 USD/Bbl seems commensurate with a practical change program and balanced interplay between fossil fuels and renewables for the foreseeable horizon. That “foreseeable horizon” is no longer a generation, however, and business strategy now has to be robust to meet turning events and challenges occurring much sooner.

The iPhone will be 10 years old in 2017. The maturing of solar technology took 10 years. Maturing shale oil and gas exploration and production took 10 years. 10 years is probably the longest any concrete non-utility energy company plan should hope to cover, whether fossil or renewable.  Thinking and doing start now.

Joyous holiday wishes to all!