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The Evolution of Oil and Gas Exploration and Production in the Coming Years

Oil and Gas | Oct, 2023

As the world begins to recover from the stagnation caused by the COVID-19 pandemic, a resurgence in oil and gas demand is observable. However, this recovery is juxtaposed against enduring changes in our lifestyles, work patterns, travel behaviors, and technological adoption, implying consequential shifts in the conventional oil and gas business paradigm. Though global energy demand is projected to surge by up to 50 percent by 2050, the extent to which the oil and gas industry will sustain its current role in supplying this energy remains uncertain.

Forecasts indicate that it might take until the conclusion of 2021 for global oil demand to regain its momentum at 100 million barrels per day (b/d), while alternate perspectives cast doubts on demand ever reclaiming pre-COVID-19 levels. Amidst this, excessive production capabilities, plummeting commodity prices, and turbulence in equity markets have caused substantial depreciation in the valuation of energy company stocks and bonds, amounting to billions of dollars in losses. Concurrently, banks are striving to curtail their exposure to oil and gas entities amidst the ongoing demand crisis, potentially leading to untimely loan repayments. These developments bear cascading implications for an industry that has recently undertaken cost-cutting measures in response to the 2014 price collapse.

Government Commitments

Developing economies are anticipated to witness an increase in oil and gas demand until 2035 and beyond. Notably, China, the world's largest economy, has outlined an energy development plan mandating that non-fossil energy account for 15 percent of total energy consumption by 2020 and 20 percent by 2030. Furthermore, China is leading the global electric vehicle (EV) manufacturing and sales arena, spearheading an ambitious campaign to electrify transportation.

Recent times have witnessed the unveiling of several COVID-19 stimulus packages featuring sustainable infrastructure and clean energy initiatives, exemplified by the European Green Deal. Notably, nations are embedding lower-carbon intensity criteria into their liquefied natural gas (LNG) contracts, committing to source solely from operators offering environmentally friendlier products. Initiatives within the United States, such as California's proposition to ban gas-powered cars and passenger trucks by 2035, underscore proactive measures by state and local governments.

Corporate Endeavors

In the absence of stringent government regulations, companies across the globe, especially in the United States, are proactively pursuing carbon reduction and renewable energy objectives. A significant portion of the Fortune 500 has established targets to curtail their carbon emissions, with 23 percent committing to achieve carbon neutrality through the adoption of 100 percent renewable energy and science-based emission reduction goals by 2030, or even earlier.

Capital Markets

As the trajectory shifts towards cleaner electricity consumption, many investors are increasingly prioritizing impact and Environmental, Social, and Governance (ESG) investments while divesting from fossil fuel ventures. Evidenced by ESG-linked stocks outperforming benchmark averages, even during the COVID-19 crisis, investors are channeling substantial funds into ESG-informed strategies. Historically, oil and gas companies faced substantial shareholder risks when diverting resources to ESG-related ventures. However, the shifting sentiment of shareholders reflects an acknowledgment that an ESG-focused approach can insulate investments from negative share price trends. Thus, diversifying into activities that bolster ESG ratings and perceived market value might be more favorably received and embraced by investors in the present climate.

Concurrently, pressure is mounting on banks, insurers, asset managers, and other market players to exclusively engage with businesses adhering to pre-defined ESG criteria. Global initiatives like the EU Action Plan on Sustainable Finance aim to redirect capital towards sustainable enterprises. Oil and gas companies that embrace ESG principles can fortify their access to debt and equity finance. Rather than confining oil and gas entities, these developments can be harnessed by the industry to unlock novel avenues for future growth.

The Emerging Reality for Oil and Gas

Shifts in consumer behavior, technological advancements, mobility patterns, and other trends amplifying the demand for oil and gas have been expedited by the response to COVID-19. With a history of weathering downturns and overcoming operational challenges, oil and gas companies are well-equipped to confront contemporary obstacles. Integrating ESG principles into their operational models is a pivotal step that these organizations can take. Whether they invest in renewable energy ventures, develop products that facilitate decarbonization in other sectors, or adopt strategies aligned with the 'E' in ESG, oil and gas companies can access a myriad of benefits, including enhanced access to capital, talent acquisition, stronger community relationships, and improved regulatory interactions.

Three Pathways to Enable the Traditional Oil and Gas Industry Play a More Pivotal Role in a Net-Zero World

In navigating the ongoing storm and anticipating lasting effects of COVID-19, a pivot from a sole focus on oil and gas to a broader energy services approach, particularly emphasizing renewable and sustainable energy, represents an all-encompassing solution for the challenges ahead.

Major players in the industry have subtly expanded into electricity-related domains, acquiring generation capacity, retail providers, and bolstering trading desks linked to electricity markets. Initially aimed at portfolio diversification and exposure to renewable energy production, these strategic moves now stand poised to benefit the industry post-pandemic.

Furthermore, business models aligned with decarbonization, such as alternative fuel production, leverage the industry's inherent strengths: engineering expertise, adaptability to challenging conditions, and provision of energy products and services.

Each of the following growth avenues, discussed below, empowers individual oil and gas companies to capitalize on their proficiencies, capabilities, adjacencies, and previous investments. While competition from other sectors exists, the oil and gas sector possess intrinsic advantages that position it to lead in these emerging markets.

1. Renewable Energy: The Global Surge of Solar and Wind Power

Renewable electricity generation in the United States has doubled since 2008 and could potentially contribute nearly 21 percent of the nation's electric power by 2020, according to some projections.

Renewable energy production, especially from wind and solar sources, has experienced rapid expansion. The United States now boasts over 100,000 MW of installed wind assets and over 66,600 MW of solar assets. These facilities are poised to introduce more generating capacity than natural gas in the next three years, as indicated by a report by The Federal Energy Regulatory Commission (FERC).

Across the spectrum of renewables—comprising biomass, geothermal, hydropower, solar, and wind—approximately 51 GW of new generating capacity will be added to the U.S. total by February 2023. In contrast, volumes of natural gas, coal, oil, and nuclear power are projected to collectively decrease by nearly 2 GW over the same period.

Promising Advances

Barriers associated with renewable adoption are gradually dissipating. Advanced data analytics and other modern technology tools are mitigating forecasting challenges, enabling more accurate predictions of renewable electricity availability. Leading models now predict wind energy output three to five days in advance, accurately enough to participate in capacity markets. Addressing the challenge of directing electricity from generation to consumption areas involves expanding transmission-line projects connecting energy sources to demand centers. Collaborating with private developers, utilities can leverage this approach to boost renewables penetration.

Addressing concerns regarding renewable intermittency, grid-level storage technologies substantially alleviate these issues by enabling production shifts aligned with consumption patterns. The development of more robust and cost-effective energy storage solutions, among other innovations, spurs the growth of renewable energy projects. To enhance grid-storage project economics, utilities can explore integrated solutions involving renewable energy facilities and standalone storage units, particularly when investment tax credits and comparable incentives are in play.

Notably, offshore wind is gaining momentum. While its establishment has been gradual in the United States due to regulations and environmental considerations, offshore wind exhibits significant potential as an energy source. In comparison to onshore wind, offshore wind technologies offer greater consistency, higher average wind speeds, and more efficient turbines that maximize energy collection. Despite limitations in terms of wind speeds, water depth, and location, offshore wind production already exceeded 2,000 GW (equivalent to 7,200 TWh) several years ago, more than twice the U.S.'s annual energy consumption.

Recent advancements have accelerated the viability of floating offshore wind, enabling construction in deeper waters and further offshore. Oil and gas companies, along with their support network, are well-equipped to leverage their expertise in offshore environments to explore wind energy markets and repurpose onshore and offshore infrastructure, equipment, and personnel.

Measured by the levelized cost of energy (LCoE), wind and solar technologies are at least as competitive, if not more so, than fossil fuel-based energy sources. These renewable sources are increasingly becoming the least expensive options for new generation in most global regions. Chevron, for instance, has initiated modest renewable energy ventures, amounting to around 65 MW, tailored to complement their core oil and gas operations. Notably, the company's move to establish a global power purchase agreement (PPA) aimed at greening their power supply demonstrates notable progress. Moreover, Chevron has dedicated a billion USD to Carbon Capture, Utilization, and Storage (CCUS) initiatives in Australia and Canada. In 2018, they launched a $100 million Future Energy Fund targeting innovative technologies such as EV charging, battery technology, and direct air CO2 capture.

2. Biofuels: Emerging Government Support

Next-generation biofuels have emerged to overcome the limitations of earlier iterations and traditional fossil fuels. These fuels can utilize existing infrastructure, eliminating the need for specialized equipment. They also curtail processing and refining emissions while promoting sustainable land use, including non-food crops as feedstocks. Accompanied by low-carbon fuel certifications, these biofuels are economically viable and align with environmentally conscious alternatives to conventional fossil fuels, appealing to both customers and governmental bodies.

Encouraging Developments

Government agencies and research institutions are propelling next-generation biofuels forward through diverse pathways, including biodiesel, hydro-isomerized fats and oils, biomass pyrolysis-derived diesel, cellulose-derived oxygenates, ethanol, butanol, and other alcohols, biomass pyrolysis-derived gasoline, and cellulose-derived oxygenates. The research continues to optimize fuels and combinations that balance cost, performance, and energy density for both compression and spark-driven engines. Low-carbon fuel markets are flourishing across geographies that oil and gas firms operate in, such as California's Low Carbon Fuel Standard (LCFS) and the EU's Fuel Quality Directive. These markets offer lucrative prospects for suppliers equipped with pre-existing production infrastructure capable of delivering qualifying fuels.

Capitalizing on the Opportunity

Compared to nimble and specialized low-carbon fuel producers complying with local mandates, established oil and gas companies possess a substantial advantage. They can capitalize on their experience and capacity to manufacture low-carbon fuels in regions with relevant markets, potentially operating more efficiently and effectively. Larger firms are also better positioned to scale production, surpassing the constraints faced by smaller, boutique entities with limited capital or industrial experience.

ExxonMobil, for instance, has allocated over $1 billion annually to research and development dedicated to reducing carbon emissions. With a target of achieving 10,000 b/d of biofuels production by 2025, the company is actively investing in this domain. Furthermore, ExxonMobil has made significant contributions to carbon capture and storage (CCS) and holds a stake in roughly one-fifth of the world's carbon capture capacity.

3. Commercial Transportation: Embarking on the Electric Vehicle Era

Beyond renewable energy, transportation stands as the most substantial opportunity to drive widespread adoption of low-carbon energy. Notably, electrification of the trucking industry in the U.S., which represents the largest consumer of petroleum products, holds the potential to significantly impact the oil and gas sector. Drawing inspiration from China, American oil and gas companies can envision a trajectory for transportation electrification. The Chinese government's mandate against traditional diesel buses has spurred the global electric bus market, with Chinese cities adopting more electric buses every week than the total number of commercial EVs worldwide. The over 400,000 electric buses on Chinese roads have slashed global petroleum demand growth by nearly 3 percent.

In the U.S., the transition to electric commercial trucks with extended travel ranges and fast recharging capabilities promises to dramatically reduce fuel demand. The key catalyst for transforming the transportation landscape is the declining cost of battery technology.

Promising Advancements

Over the past decade, battery manufacturing costs have dropped by an average of 18 percent annually. With ongoing price reductions, the business case for battery-powered trucks becomes increasingly appealing. Initial applications are expected to focus on local and regional routes, covering distances of less than 200 kilometers per day, mainly within urban areas. Trucks assigned to these routes require batteries less than half the size of those used in long-haul platforms, resulting in lower premiums for battery purchase—under $25,000. These savings can be recovered in less than two years due to reduced fuel and maintenance expenses.

The Opportunity for Oil and Gas

The altered consumer purchasing habits influenced by the pandemic are likely to persist, magnifying the volume of deliveries—from manufacturers to warehouses to homes. Electric commercial trucks represent a strategic avenue for companies to enhance efficiency and meet emissions targets. While the utility sector has surged ahead in establishing charging infrastructure, oil and gas enterprises with a downstream presence can consider installing charging stations at warehouses and manufacturing sites.

Royal Dutch Shell's commitment to low-carbon business entails annual investments of $2 to $3 billion in wind and solar power generation alone, alongside additional funding allocated to EV charging, hydrogen, biofuels, and clean energy innovations. Through ventures such as Shell Ventures, the company engages with Small and Medium Enterprises (SMEs) to cultivate new technologies and business models.

AI stands as one of the most significant ongoing trends, driving the fourth industrial revolution. With its potential to address pressing issues like climate change and pollution, AI is gaining prominence. Energy companies are leveraging AI to digitalize records, analyze extensive datasets and geological maps, and potentially detect issues such as equipment overuse or pipeline corrosion.

Dutch energy leader Shell Plc exemplifies this trend. They recently unveiled intentions to integrate AI-powered technology, developed by big-data analytics firm SparkCognition, into their deep-sea exploration and production processes. The objective is to enhance operational efficiency, accelerate processes, and augment production.

"We are dedicated to discovering novel and inventive approaches to revamp our exploration methodologies," remarked Gabriel Guerra, Shell's Vice President of Innovation and Performance.

SparkCognition's Chief Science Officer, Bruce Porter, highlighted the far-reaching potential of Generative AI for seismic imaging. This technology could significantly condense exploration timelines from months to mere days – less than nine days to be precise. The Generative AI generates subsurface images with fewer seismic data scans, contributing to the preservation of deep-sea environments. Reduced seismic surveys will expedite exploration, streamline workflows, and yield cost savings in high-performance computing.

Notably, this isn't Shell's inaugural venture into AI. In 2018, they collaborated with Microsoft to incorporate the Azure C3 Internet of Things platform into offshore operations. This platform employs AI to optimize various aspects of offshore infrastructure, spanning drilling, extraction, employee empowerment, and safety.

Shell isn't alone in embracing AI within the oil industry. In 2019, BP Plc invested in a Houston-based tech startup named Belmont Technology, aiding in the development of their cloud-based geoscience platform nicknamed "Sandy." This platform empowers BP to interpret geological and reservoir data, generating unique "knowledge-graphs" and robust subsurface asset images. Through neural networks, BP performs simulations and interprets results.

Aker Solutions, in conjunction with SparkCognition, embarked on an AI-centered initiative known as "Cognitive Operation" in March 2019. Their AI system, SparkPredict, oversees monitoring for over 30 offshore structures, both topside and subsea, significantly enhancing AI applications.

As per TechSci Research Report, “Offshore Oil & Gas Rig Market - Global Industry Size, Share, Trends, Competition, Opportunity, and Forecast, 2017-2027, Segmented By Type (Jackups, Semisubmersibles, Drill Ships, and Others), By Water Depth (Shallow Water, Deepwater and Ultra-deepwater), and By Region”, the market is anticipated to grow with a robust CAGR of 5.69% due to high demand for oil and gas, oilfield facilities, etc.

In Conclusion

The pandemic has not hindered the global momentum towards sustainable energy, contrary to some predictions. Driven by consumer demands, governmental actions, and other market dynamics, the trajectory of primary energy consumption is veering away from fossil fuels and gravitating towards renewable and decarbonized alternatives. While these developments present challenges for traditional oil and gas players, they simultaneously present opportunities for the adoption of new, clean-energy business models that can drive recovery and prosperity in a net-zero future.

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