Energy Visions 2018
What makes the next 10 years the decade of disruption?
Global energy markets are undergoing dramatic change, a transition that has the potential to disrupt the oil and gas industry on a global scale. Technology continues to help companies weather the storm of disruption by finding operational efficiencies and addressing environmental concerns. But over the long term, technology advancements also have the broad power to disrupt the oil and gas sector in large and unexpected ways.
Disruption driven by technological innovation is creating major shifts in the outlook for fossil fuels demand. In fact, some of Europe’s largest oil and gas companies are forecasting global oil demand will peak in the next several decades, owing mostly to enhanced efficiencies and a transportation revolution: the proliferation of electric vehicles (EVs) and hybrids along with other advancements in transportation more broadly. Long-term demand also has the potential to be shaped by other environmentally conscious technologies, including advances in biofuels, autonomous vehicles, ride sharing, fuel cells, smart cities, fuel efficiency programs and the electrification of aviation.
So what does the disruptive power of technology mean for Canadian producers? It’s important for them to understand the issues surrounding technology in order to identify opportunities and capitalize on the transition to a new world energy order.
“Investors need to do the math on electric vehicles, demand, OPEC and shale and will realize that we need oil sands supply—and that it’s some of the most profitable and predictable globally.”
“It’s very important to look at Asia, as the success of these technologies in Asia is what’s going to make the difference because that’s where the demand is really concentrated.”
While classified as a relatively niche term a year ago, “peak demand” for oil and the debate surrounding it have gained significant attention. Along with shifting the conversation away from a potential “peak supply” scenario, the idea of a structural weakness in demand has altered past assumptions and created new uncertainties to consider. The emerging dynamic has the potential to challenge the way Canadian energy companies think about the future of global energy markets.
A shift in the outlook for oil consumption is being driven by several factors, such as climate-change policies and rising air quality concerns. What began as heightened global awareness to reduce greenhouse gas emissions ushered in by the Paris Agreement has turned into heightened momentum behind global environmental initiatives.
Meanwhile, technological advances and falling costs of batteries are also significantly contributing to this potentially disruptive transition. According to a recent report from Bloomberg New Energy Finance, some EV models could be the same price or cheaper than internal combustion engines (ICEs) in the next decade due to falling battery prices. All of this said, most experts agree oil and gas will continue to supply the baseload supply of energy and dominate global energy demand. They don’t predict a sharp drop in fossil fuel consumption, although renewables will grow as overall global energy consumption grows.
Disruptive technologies and government-led initiatives play an important role in the peak demand debate. The evolving landscape is sure to create winners and losers, and as a result, Canadian oil companies must take action to be in a better position in an era likely to be defined by major change.
Increasing policy support along with the falling costs of renewable energy have accelerated the growth of clean technologies around the world, most notably in the power sector. But the impact of this convergence of technology and policy on the transportation sector remains a key uncertainty. Transportation accounts for the lion’s share of global oil demand (about 60% according to the IEA), so a shakeup of that sector would have a dramatic effect on global oil demand.
There’s been rising government action to address emissions, including proposed bans on new sales of ICEs, efficiency mandates and using EV quotas, incentives and subsidies to boost the share of low- and zero-emission vehicles. At the same time, automakers have started to ramp up the amount of hybrid and EV models offered.
Despite the hype, EVs still have a long way to go before they can make a true dent in the global auto market. At the moment, they represent about 1% of global auto sales. Still, there’s always the potential for a game-changing technology that could speed up and catalyze the widespread adoption of EVs, especially by addressing concerns like high costs and infrastructure issues. As the market has learned many times before, it’s not wise to bet against technology.
As governments continue to grapple with transportation emissions, the proliferation of EVs in major traditional oil consumption growth markets like China will increasingly impact the long-term outlook for oil demand. China accounts for about half of global EV (including hybrid) sales, and several Chinese cities have been making strides on autonomous vehicles and electric buses. Importantly, in China, the EV push is less about climate change and more about tackling rising air quality issues as well as a form of industrial policy. Batteries and EVs are seen there as an opportunity to gain a competitive advantage in a developing manufacturing industry that doesn’t yet have a global leader.
While EVs will have an important role to play in the global auto market, there’s a lot of evidence that points to the fact that oil will retain a key role in the global energy mix for the foreseeable future. Along with anticipated rising long-term demand for oil in the petrochemicals sector, freight and long-haul transportation will continue to drive future consumption. By the 2040s, there could be hundreds of millions of passenger EVs on the road but still more than two billion ICEs for other transportation uses needing oil.
“The most important disruptions relate to efficiency. In power, new high-efficiency lighting has cut consumption of primary energy [by] a factor of ten. Some of this will be offset by higher demand—the so-called rebound effect—but for the most part, these are shifts in the demand curve.”
“Canada offers the world a long term and secure source of energy, and it will be a critical source in in supplying the world a stable energy source to meet baseload demands that are not expected to decline in the near term.”
For Canadian oil and gas producers, ever-changing market dynamics can obscure the path forward. One source of the uncertainty is the lack of a consensus around oil demand forecasts, including long-term predictions about if and when demand could peak. The varying forecasts are undermining the investment appetite for upstream long-cycle projects. (Explore this trend more deeply.)
But they’re also creating opportunities to capitalize on a new world energy order and inform faster and more agile decision making. Technology and capital discipline will be key for companies to more quickly respond to a possible future supply gap.
It’s also important to stimulate innovation within organizations and be the disruption. With great uncertainty around change, ideas that challenge convention often never come to fruition—or come too late. It’s time to bring game-changing ideas to market that are built for tomorrow’s customer.
The disruptive power of technology means Canadian producers need to understand the issues, identify opportunities and move forward with confidence. They’re encouraged to face the changes in the industry head-on, creating the disruption themselves through continuous innovation and game-changing ideas.
Partner, National Energy and Alberta Consulting Leader, PwC Canada
Tel: +1 403 509 7397
National Tax Leader Energy, Utilities, Mining and Industrial Manufacturing, PwC Canada
Tel: +1 403 509 6373