By Andrew Inkpen, Michael H. Moffett| Nov 23, 2011
The global oil and gas industry is huge, controversial and poorly understood by most people. This lack of knowledge is surprising, given how important the industry is in the global economy
Oil and gas companies touch our daily lives with products such as fuels, asphalt, lubricants and thousands of petrochemical products from carpets to eyeglasses. The industry impacts national security, elections, geopolitics and international conflicts.
Although thousands of books have been written about the industry, most are technical guides with narrow audiences or populist diatribes on the coming end of society as we know it. Among the books that deal with the business side of the industry, many are written by technical experts for nontechnical readers.
Our new book, “The Global Oil & Gas Industry” (PenWell, September 2011), takes the opposite approach. We have written a nontechnical book to help engineers, scientists and other professionals better understand the business dynamics of their own industry. The book also provides a guide for students and general readers interested in learning more about the oil and gas business.
In recent years the industry has seen many tumultuous events. These include efforts in energy-producing countries such as Kazakhstan, Russia and Venezuela to exert greater control over their resources; major technical advances in deepwater drilling and shale gas extraction; Chinese firms acquiring exploration rights at record-high prices; ongoing strife in Sudan, Nigeria, Chad and other oil-exporting nations; continued debate about global climate change and nonhydrocarbon energy sources; and huge volatility in energy prices.
All of this comes amid predictions that global energy demand will increase by 30 percent to 40 percent by 2030. In the final chapter of our book, we explore ways this spike will impact you, your business and your community. We look at key trends in three areas of oil and gas: the products, the markets and the players.
In terms of products, increased demand for natural gas will be a major game changer in the U.S. and global markets. Massive shale gas discoveries will contribute to this trend and transform the industry.
Demand for clean energy will also grow, but significant developments will come slowly. Historically, government mandates to shift demand away from fossil fuels have resulted in subsidized programs that are widely viewed as inefficient, such as the ethanol program in the United States and solar programs in Germany.
Demand for oil is another story. While overall energy demand will rise worldwide, oil consumption will likely drop in the coming decades. Peak oil demand will arrive first in developed markets — probably within the next decade.
This will be a function of several factors, including: aging populations that drive less (especially in Japan and European countries such as Italy and Spain), greater fuel economy in cars and trucks, a shift toward smaller vehicles with advanced diesel engines and hybrid systems, the introduction of electric cars, greater commitment to fuel efficiency, and a shift away from heating oil to gas and electric.
Despite these trends, exploration and production firms will need to find new sources of oil. Some of this oil will come from new technology, which will prolong the productivity at existing wells and enable enhanced recovery. These advancements will help but will not be enough.
Significant new oil discoveries will be needed, a process that will become increasingly difficult. Explorers will have to look at greater depths beneath the earth’s surface for wells that will produce lower yields at higher costs than the oilfields of today. Some new reserves will come from onshore wells in countries that are geographically, culturally, and politically distant from consuming nations.
Most new discoveries will come in deep water off the coasts of Africa, Brazil, Canada and Norway. The Arctic region also could become increasingly productive, as could the East and West coasts of the United States — depending on the political environment.
The 2010 BP Macondo spill magnifies the risks of offshore drilling; however, as oil demand increases, these risks will become more acceptable. The costs will also become more acceptable until peak oil demand occurs, at which point innovation will slow and costs will plateau.
As products change, so will global markets. Emerging market countries will drive most of the growth with China leading the way.
According to the International Energy Agency, 2009 was the first year that China used more energy than the United States. Although most of China’s energy consumption is from coal, the country’s huge increase in automobile use means that oil imports will rise substantially in the coming years.
China currently consumes half as much oil as the United States, but the International Energy Agency projects that China will become the world’s biggest importer of oil and gas after 2025.
China implements its energy policy through large national oil companies, which operate very differently than their international counterparts. In the future, these Chinese companies will compete with international firms for energy reserves and also for government influence in resource-rich countries. Chinese companies already have made oil and gas acquisitions in Central Asia, Africa, South America, Canada and the Gulf of Mexico.
Many factors, including rising energy demand in China and other emerging markets, will contribute to continued price volatility. Despite the high prices of recent years, the industry will continue to go through up and down cycles.
The changing fuels and markets will have at their center the actors — the players and their strategies — forcing change, action, reaction and new opportunities. Overall the oil and gas industry will grow more diverse in terms of the number and variety of competitors.
In the publicly traded sector, one analyst noted that a decade ago, three supermajors — BP, ExxonMobil, and Shell — accounted for about half of the oil and gas industry’s stock market capitalization. Today, they account for less than a third, having lost ground to faster-growing exploration-and-production, services, and infrastructure stocks.
Another recent development is the emergence of private-equity-backed, pure-play exploration firms with no oil and gas production. Companies in this category include Cobalt International Energy and Kosmos Energy.
Finally, many national oil companies will continue to expand beyond their home markets. These companies will grow in power as they learn to manage their own resources and develop into fully integrated global players. There is no going back to the old model of the state-owned enterprise as the custodian of its national reserves, while international companies manage the business.
When peak oil demand occurs, national oil companies will still control the lowest marginal cost oil, so their power in the industry will be maintained. However, their power over the broader energy industry will eventually decline.
All of this will affect your company and the way you do business. To learn more, enroll in the Certificate in Global Oil & Gas Management, an open enrollment course that Thunderbird Online will launch in January 2012.
Andrew Inkpen, Ph.D., is the J. Kenneth and Jeanette Seward Chair in Global Strategy at Thunderbird School of Global Management in Glendale, Arizona. Michael H. Moffett, Ph.D., is the Continental Grain Professor of Finance at Thunderbird. They both work closely with oil and gas clients in Thunderbird Corporate Learning, the school’s executive education provider.