Several years ago, analysts covering the oil industry were raising alarm bells about how the major oil groups would be making money in the decades to come. With conventional oilfields maturing and no sign of the shale gas revolution at that point, there was pressure from shareholders for them to get into renewables. The majors responded by delving into projects to extract biofuels from chicken fat and soybeans. But that phase is over.
The major oil groups found salvation in unconventional oil and gas production. By unconventional, I mean new ways of getting to oil and gas. In conventional production, drilling a hole into the ground is enough to get oil and gas to flow to the surface. And over the years, as that flow slowed, the industry turned to technology to help the fuel along, for example, by pumping in water and carbon dioxide. But it did not seem that alone was going to produce enough to sustain the majors decades down the road.
In recent years, the majors have found a string of other new ways to ensure their relevance into the future. They began to take a closer look at Canada’s oil sands, which took more work to turn into fuel but began to become economic as oil prices rose. They moved into deeper waters and found massive discoveries there. And then came the view that natural gas could increasingly replace oil, fuelling the development of massive liquified natural gas projects in places like Australia. Yet another advance in technology enabled the industry to economically extract gas – and now oil - from shale and other tightly-packed rocks.
Wood Mackenzie, the energy research firm, has come up with some interesting projections about how all this unconventional production will fuel the industry for years to come. From their research:
All this reshaping of the majors’ portfolios to focus more on these new ways of extracting oil and gas will be good news for the industry in the years to come. Simon Flowers, Wood Mackenzie’s head of corporate analysis, explains:
Mr Flowers notes that this contrasts with the international large market capitalisation peer group – names like Murphy and Apache but excluding BG, which he believes is poised for exceptional production growth through the decade. For them, Wood Mackenzie expects production to be 14 per cent lower in 2020. Part of the difference reflects the fact that the majors are increasingly focusing on resource themes with long reserves life such as LNG, whereas as the large caps are more dependent on conventional assets with front-loaded production:
It indeed seems the majors have found salvation in technology. This is why they are so determined not to let environmentalists block access to these resources. ExxonMobil has established its own natural gas focused website to counter criticisms about the impact of so-called fracking technology. The API lobby group is fighting to ensure access to Canada’s oil sands. And so on.
The problem is that accidents like Exxon’s pipeline break under Yellowstone River tend to undermine whatever inroads are made by the industry and the calls for domestic energy security. This is something the industry has to come to grips with. While no industry has a flawless record, it seems the oil and gas industry has had too many accidents at such a critical time when it is staking its future on access to unconventional resources. Macondo alone is a household name in the US. There have also been issues in shale production. Lately, there have been a string of pipeline accidents.
If the end result is that access to these new resources are increasingly blocked – as seen by efforts in various American states and in France - the industry must see it has nobody to blame but itself.