Have Oil and Gas Companies Seen Their Best Days?


No. The actions of large oil and gas companies will continue to shape the global economy for the foreseeable future. Despite efforts around the world to diversify away from hydrocarbons, state-owned oil and gas companies and large independent producers will grow and prosper, and be critical players in efforts to move toward a net-zero emissions regime. If you’re a pension fund, buy stocks of the major oil and gas producers, including those from China, Russia, and Saudi Arabia (after Aramco’s IPO).


Oil and natural gas will continue to be key energy sources for the foreseeable future. In May 2016, Shell’s scenario group published a plausible scenario of the world meeting international climate goals and achieving a net-zero emissions state. Shell described a number of key developments over the next 50 years that could lead to net-zero emissions, including significant investments in solar, wind, and nuclear sources, carbon capture and storage technologies, many country de-carbonization strategies, and a global carbon pricing system—whether through carbon trading, carbon taxes, or mandated carbon-emission standards. However, for the future global population of 10 billion people to have a decent quality of life, the global energy needs would have to double by the end of the century. Oil and natural gas would have to remain important energy sources for the next forty years, until solar, wind, and nuclear sources can assume the burden of meeting the global economy’s needs. When the net-zero emissions state reached, let’s say by the end of the century, the share of oil and gas in the overall energy mix will have fallen from 57 percent to around 15 percent, while the non-fossil-fuel share will be just under 80 percent.

According to the International Energy Agency (IEA), to have a chance at keeping global warming to less than 2ºC above pre-industrial levels, oil demand would have to peak in 2020 at 93 million barrels per day (b/d), just above current levels, and oil use in passenger transport would have to decrease dramatically. Shell’s chief financial officer said he expected oil demand could peak in 5 to 15 years. State-owned China National Petroleum Corp. recently forecast that China’s oil consumption would begin to decline by 2030. But the uncertainty is high on when demand might peak. It could be much later. In its most likely scenario, where more stringent government policies to limit global warming aren’t effectively implemented, the IEA says oil demand will continue to increase beyond 2030.

There is plenty of oil and gas. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters. Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share.

The last three years have been tough on OPEC countries that rely on oil and gas revenues for their government budgets. The International Monetary Fund in October 2016 estimated the oil price needed to balance Middle Eastern government budgets ranged from a low of $47.76/b for Kuwait to a high of $216.46 for Libya. The prices are a key indicator of the governments’ dependency on oil revenues and the budget difficulties they face when prices fall. Surprisingly, Iran at $55.29/b is perhaps less motivated than Saudi Arabia at $79.71/b for a large price increase. In 2015, Saudi Arabia posted a budget deficit of $98 billion. In October 2016, the Kingdom issued $17.5 billion of bonds, its largest amount ever. Governments facing years of economic difficulties are struggling with how much effort should they apply to save existing ventures (and the jobs), mitigate the impacts of the closed or canceled ventures, and change the incentives to attract new multinational and local investments.

Government incentives and hurdles toward increased oil and gas development activities vary significantly around the world.

  • Government stakeholders in the United States are questioning the companies’ financial and accounting practices, business models, and oil-spill and climate-change prevention efforts. The US Securities and Exchange Commission is looking into whether ExxonMobil values its unproduced-reserves appropriately after the oil price declines and potential regulatory action on climate change.
  • The US Energy Department recently curtailed licensing and development plans for Alaska’s Arctic region. The US Energy Information Administration in its 2016-published energy outlook shows oil production from Alaska decreasing to less than half its current level after 2030.
  • The governor of the Bank of England suggested in September 2015 the companies should disclose how they would manage climate-change risks.
  • Saudi Aramco, the largest oil producer in the world, is producing oil at record levels.
  • Russia is developing oil reserves as fast as it can under western-government sanctions. Iran is aggressively trying to expand.
  • In November 2016, at the end of China’s President Xi Jinping’s visit to Latin America, China’s state media released its strategic blueprint for China-Latin America relations. Latin America is already China’s second-largest investment destination after Asia. Much of the investment is in energy projects. An example, state-run State Grid Corp. of China, the world’s largest electricity provider by revenue with $312 billion, is pursuing a takeover of CPFL Energia SA, the Brazilian electric company, for $13 billion.

The environmental risks of commodity operations are not going away, and new ones continue to come to light.

  • Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing through the supply chain leaks out.
  • Petrobras is implementing a divestment plan to sell $15 billion in assets to help pay off the company’s very high debt load of $126 billion. In the spring and summer of 2016, Petrobras sold stakes in Argentina and Chile subsidiaries, a large offshore oil field to Norway’s Statoil, and petrochemical units to Mexico’s Alpek.

Fueled by commodity prices, particularly oil exports, sovereign-wealth funds—financial vehicles owned by governments—doubled in size from 2007 to 2015 to $7.2 trillion. Since 2007, the number of sovereign funds increased by 44 percent to 79, many in Africa and Asia. Nearly 60 percent of sovereign wealth fund assets are related to energy exports.

Oil prices peaked in August 2013 over $110 a barrel. They bottomed out below $30 a barrel in January 2016. Since May 2016, prices have been relatively level, bouncing around between $40 and $50 a barrel. Not surprisingly, the number of rigs drilling for oil in the United States is up by 50 percent since May.

The world’s seas are becoming more efficient in moving hydrocarbons.

  • The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. The Canal hopes to recover the 10 percent to 15 percent of annual revenue lost to the Suez Canal from 2013-2015. A key market of the future for the canal could be LNG carrier traffic.
  • Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.
  • Ship transport of Russian Barents Sea oil along the Norwegian Arctic coast in the first part of 2016 reached new highs because of cumulative oil-development and port infrastructure investments over the last decade in the Russian sector above the Arctic Circle.

Producers are following the market toward gas. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.

  • US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada.
  • China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas—that many investors around the world were counting on. Sinopec is counting on rapidly expanding natural gas production from shale reserves.
  • US coal exports to China have recently shrunk to almost nothing. They were almost 6 million short tons in 2011, 10 million tons in 2013, and about 300 thousand to date in 2016. Out of seven West Coast export terminals proposed in the past five years, none has opened.

During the last three years of low oil and gas prices, independent oil and gas companies have been reluctant to start new ventures, even to secure low-cost reserves.

  • In 2016 ExxonMobil lost its triple-A bond rating that it has had since 1930. In 2015 it failed to find enough new oil and gas to replace what it produced for the first time in 20 years. And in October 2016 it announced some 4.6 billion barrels of its reserves, nearly 20 percent of its oil and gas reserves, mainly in Canada, may be too expensive to produce.
  • Exxon Mobil is not continuing its involvement in a venture to build a new LNG export terminal in Alaska. The project is not forecast to be very competitive in the world. Just a year ago, the Alaska state government paid $65 million for TransCanada Corp.’s 25% share in the overall project that was expected to cost between $45 billion and $65 billion. BP and ConocoPhillips, other shareholders in the venture, are also expressing concerns about the project.
  • In November 2016 Blackstone Group cancelled an $800 million venture it set up two years before to invest in distressed oil and gas assets in Southeast Asia. Potential sellers such as international oil companies hung onto assets rather than selling on the cheap.

But Russian and Chinese companies have been getting bigger and better while the prices have been low.

  • Russia’s oil and gas companies, Rosneft, Gazprom, Gazprom Neft, Lukoil, and Surgutneftegas—all operating under guidance by Putin’s government—continue to grow and become more capable. Their development and production activities are Russian focused, but the companies have extensive international relationships with technology partners, financiers, service companies, and customers.
  • Russia’s oil and gas ties with both China and India have increased significantly in the last three years. In October 2016, Russia’s state-controlled Rosneft announced the purchase Indian refiner and gas-station owner, Essar Oil, Ltd. for $7.5 billion.
  • Russia also has deals to supply oil and gas to China and for Chinese companies to buy stakes in Russian energy projects abandoned by western firms due to the sanctions. China’s support to Russian energy and infrastructure projects is critical but fragile. For the Yamal LNG project Chinese lenders recently signed a $12 billion loan agreement after two years of talks. But many other agreements signed in the last two years haven’t yet led to firm contracts, and the perception is China has been able to take advantage of Russia’s weak negotiating position. Also, China’s goal of building land and sea routes that will enable Europe to connect more easily with China could reduce Russia’s role as a trading partner of Europe.

As the technological and operational leader in the Arctic region, the partially state-owned Norwegian oil company, Statoil, is continuing to pursue opportunities throughout the region, including in Russia despite the strained political ties between Russia and Norway and the EU. Statoil’s strategic cooperation with Rosneft involves joint exploration in the Russian Barents Sea and Sea of Okhotsk (in the far east of Russia), as well as pursuing interests in a license in the Norwegian Barents Sea. Statoil began drilling in June 2016 in the Sea of Okhotsk. “We are pleased to have entered a key stage in our long term cooperation with our partner, Statoil . . .,” said Igor Sechin, chief executive of Rosneft and an ally of Russian president Vladimir Putin in July 2016. On the other hand, Norway and Statoil would like to continue selling natural gas extracted from Norwegian waters to Europe. But replacing the aging gas fields in Norway has been difficult, and Statoil and other energy companies haven’t yet made the next big discovery in Norwegian waters that would justify building the large necessary gas export infrastructure.

Some integrated oil and gas companies are also investing in alternatives to oil and gas. Solar and wind energy sources are growing rapidly around the world and their prices now are competitive with fossil-based sources. In a figure by IHS Markit in The Economist November 26, 2016 issue, the cost of power generation in the United States from solar is competitive with oil (although oil isn’t used anymore in power generation). The cost of natural gas is on par with coal. Worldwide, renewable energy passed coal as the world’s biggest source of power-generating capacity. Statoil, Norway’s state-owned energy company, is investing in carbon capture and storage technologies and offshore wind farms.


Large oil and gas companies around the world will do well for the next 20 years largely because demand for oil and gas will continue to increase because the world economy will depend on them. The major uncertainty for all the companies is the policy restrictions on carbon sources that will be implemented. Unless extensive bans on using fossil fuels are implemented, the companies will remain major players in the global economy.

After the next 20 years, the range of uncertainty on the energy sources used in the world remains extremely wide. The use of nuclear, the government restrictions on hydrocarbons, the technology innovations in renewables and CCS, etc. all remain highly uncertain.

While the demand for oil will increase for the next 20 years, the demand for natural gas is going to explode.

  • The two big hurdles for companies developing the new oil and gas reserves will be the large capital required to explore, develop, and produce oil and gas in hard to reach places, and the liability risk to companies from oil spills and contributing to global warming.
  • For oil and gas companies, NGOs, and other energy stakeholders, a key to their success will be their abilities to manage in a complex environment, subject to disruptive changes. Will organizations develop the necessary capabilities, processes, and strategies for an environment of continuous change?

Prices will grow slowly over the next five years.

  • The large, integrated oil and gas producers will specialize in developing low-cost oil and gas reserves anywhere they can be found.
  • They will flock back to Russia when sanctions are lifted.
  • If sanctions aren’t lifted, Russia will get the expertise and financial support it needs from China, India, Brazil, and special deals made with Statoil and others.
  • Africa and North and South America will be major areas of activity.
  • Technology innovation (e.g., in fracking) will continue to lower the costs of extracting oil and gas from source rock.

Greenhouse-gas (CO2 and methane) emissions will likely increase each year and accumulate in the atmosphere and ocean.

  • The battles over the development and use of fossil fuels could become even more intense.
  • NGO’s will continue to object to natural gas development and production activities and the companies that conduct them. Becoming a good world citizen will be hard for gas companies to achieve.
  • Large private oil and gas companies could experience more protests wherever they operate.
  • Russian and Chinese companies will be singled out more and more by NGOs.
  • Many western governments will find themselves simultaneously penalizing Russian and OPEC producers or taxing imports from them while welcoming them as important gas and oil suppliers to their countries.

Most of the large independent oil producers will become majority gas producers. They will follow the various government incentives to increase natural gas production to displace coal and enable a net-zero emissions system. However, the companies will continue to be seen as dirty and dangerous to the environment because of their extensive oil operations and the safety issues associated with the natural gas.

Large western companies will compete well for large projects because of their project experience, use of new technology, and ability to raise large amounts of capital.

  • Chinese companies will become fierce competitors of the large western companies around the world.
  • Russian companies may expand operations outside of Russia.
  • Technology innovation will be extensive in the pursuit of low-cost oil. Many technologies will be valuable in other realms—security, environmental monitoring, automation for underwater and harsh environments, etc.

OPEC Producers are not going to slow down. OPEC producers will not reduce oil production to any degree in order to boost market prices. They might pledge to limit production, but they will continue seeking ways to expand production to meet future demand around the world. Aramco will still produce at high levels.

Sovereign-wealth funds will be more important financiers of oil and gas developments in the future—often the only sources of capital for very large projects.

Oil and gas companies will perform very well financially, and will remain amongst the largest corporations in the world in terms of revenues. But the costs to them of catastrophic environmental events will rise. It’s uncertain how a foreign company, even if it were Chinese, would fare if they were responsible for a major event in the Arctic region that couldn’t be cleaned up.

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