Föhrenbergkreis Finanzwirtschaft

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Oil Industry Anticipates Day of Reckoning

Posted by hkarner - 29. November 2016

Date: 28-11-2016
Source: The Wall Street Journal

Prospect of ‘peak demand’ prompts debate and long-term planning by global producers

Forecasters see demand for oil-based fuels shifting to natural gas and renewable energy sources over the long term.

This month, European oil company MOL Group delivered a stark message to investors: Demand for fuel in its key markets is bound to fall.

So-called peak oil demand is a mind-bending scenario that global producers such as Royal Dutch Shell PLC and state-owned Saudi Aramco are beginning to quietly anticipate. But MOL has a transformation plan that is among the most explicit responses to the trend, indicating how the landscape may change for big energy providers over the next decade.

The Hungarian company is rethinking its traditional focus on fuel supply and shifting investment to petrochemicals, the key ingredient of everyday plastic products and a sector where MOL believes growth will continue even when its fuel business falters.

Although there will still be customers for its fuel, the company reckons demand will soon flatten and then start falling in its Eastern European markets around 2030. “We see that as an inevitability,” MOL Chief Financial Officer Jozsef Simola said.

Big oil players such as Exxon Mobil Corp, BP PLC and Saudi Arabia—which is leading recent efforts by the Organization of the Petroleum Exporting Countries to boost oil prices—are also anticipating significant shifts in demand, though there is no consensus on the timing and their moves have been gradual. They are increasing their investment in petrochemicals, pumping more natural gas, driving down costs and even diversifying into alternative energy sources like solar power.

oil-consumption-scenariosLast month Shell finance chief Simon Henry caused a stir when he said the company sees oil demand peaking in five to 15 years. Shell’s latest published forecasts have consumption flattening toward the end of that period.

State-owned China National Petroleum Corp. quietly issued a report in the summer predicting that China’s oil consumption—a major driver of growth in recent decades—will begin to fall by 2030, if not sooner. Global demand is expected to follow suit.

The International Energy Agency, which advises industrialized countries on energy policy, says consumption will continue to rise for decades in its most likely scenario. But that picture shifts radically if governments take further action to limit global warming to less than 2 degrees Celsius with more stringent policies like carbon pricing, strict emissions limits and the removal of fossil-fuel subsidies. If that happens, oil demand could peak within the next 10 years, the IEA says.

“The question is more a question of when, rather than if,” Dominic Emery, BP’s vice president for long-term planning and policy, told the Economist Energy Summit in London this month. BP says oil demand could fall by the late 2020s if tougher emissions laws are enacted.

Others don’t see peak demand coming so quickly. Exxon expects consumption to grow through 2040, though at a decelerating pace. Likewise, OPEC sees demand continuing to grow beyond 2040, but acknowledges new technologies and efforts to curb climate change could mean consumption peaks within the next three decades.

Still, OPEC mainstay Saudi Arabia, the world’s largest exporter of oil, is pushing its state oil company to invest heavily in petrochemical plants around the world. The kingdom is trying to diversify away from oil, publicly list Aramco to raise money for other industries, and build a new base of renewable energy.

Peak demand “will be later than the common dates that are being thrown around, but if it does happen, because we’re building multiple engines for the economy and we’re planning for an economy beyond oil, we’ll be ready,” Saudi Arabia’s energy minister, Khalid al Falih, told a conference in Istanbul last month.

Timing and preparing for peak demand are critical to companies’ fortunes. Energy producers could move too fast to adapt to shifts that are still years away. Or new technologies and policies could leave them vulnerable to changes that happen sooner than expected.

‘To come to a point to say that, wow, maybe the future will be different…that was not easy for guys like myself.’ —MOL executive Ferenc Horvath

“There’s risks on both sides,” said Paul McConnell, research director of global trends at Edinburgh-based consultancy Wood Mackenzie.

Shell, Exxon and others are pouring money into natural gas—a less-carbon-intensive fossil fuel they bet will benefit from efforts to curb global emissions. In China, where growing oil demand has supported global markets for years, the state-owned energy giants are aggressively embracing natural gas as a fuel for use in everything from power generation to running cars.

Several of the world’s biggest oil companies are also increasing their focus on alternative energy sources like solar and biofuels. France’s Total SA has said it wants 20% of its portfolio to consist of low-carbon businesses within the next 20 years. The company hasn’t commented on the prospect of peak demand.

Peak demand is already arriving in some regions. In Europe, for instance, the IEA sees consumption most likely falling to 10.8 million barrels a day by the end of the decade from 11.7 million barrels a day in 2015.

Those numbers are driving big changes at companies like MOL.

“To come to a point to say that, wow, maybe the future will be different and maybe we have to prepare ourselves for a different world…that was not easy for guys like myself,” said Ferenc Horvath, head of the Hungarian company’s refining and petrochemicals business.

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