In this episode of Fundamentals, Paul Gooden, an analyst covering North America’s oil and gas producers and clean energy companies, explains why Opec (plus Russia) will drive the oil price over the next decade, and why US oil majors are finally investing more in renewables.
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Paul, it seems sometimes like all we've been talking about in the last year is oil and gas. What's keeping people up at night now?
Front of mind is the ‘energy trilemma’, which means solving for three different things. Energy has got to be affordable, it's got to be sustainable, and it's got to be reliable. Before the 2015 Paris climate deal, energy was really all about affordability. We wanted cheap energy and US shale delivered that.
After 2015 and the Paris climate deal, we needed energy to be sustainable. Pressure was brought to bear on oil and gas companies. They reduced their capex and that led to less production. So that's one of the reasons why the oil price rose over the last couple of years.
Then at the start of the year we had the Russia-Ukraine war, and that raised concerns around energy reliability.
And now we need affordability again?
Yeah.
Will that happen?
With oil, we're exiting a decade of shale abundance with production slowing because of the pressure for sustainability. There’s also shortages of labour and equipment and in some cases producers are running out of the inventory of wells that they need to drill.
But demand is yet to peak.
Right. The International Energy Agency (IEA) report about a month ago said mid-2030s would be peak oil demand. Now, I think electric vehicle penetration will rise faster than the IEA is saying. So maybe the peak comes in the early 2030s. But that still leaves about a five to ten-year period between peak shale supply and peak oil demand. And in that intervening period, Opec Plus is in control.
Opec plus, that means Russia as well?
Yes, and they will manage supplies and industry inventories to deliver the spot oil price they want. And I suspect that's US$80-plus.
What does this mean for the energy transition over the next decade?
I think we're going to see an acceleration in the energy transition above and beyond what we thought a year ago. And the reason for that is twofold. It's firstly around higher oil and gas prices. We can think of oil and gas prices as providing a pricing umbrella under which renewables operate. So, renewables become relatively more competitive.
And then secondly, governments want secure energy within their borders. Many governments are now providing more incentives for renewable generation. So, for example, the IEA has increased its forecasts for the pace of renewable adoptions by around 30 per cent versus what it thought a year ago.
You talk to oil companies all the time. How convincing are their actions when it comes to the energy transition?
You see differing strategies. If a company is in exploration and production, typically their strategy is not particularly aligned to towards an energy transition. They're just trying to supply the cheapest barrel possible. For the bigger integrated companies, like Exxon or Chevron, they are allocating an increasing proportion of their capex towards renewables. And the US majors have lagged the Europeans in this regard.
Why do you think that is?
The US strategy is slightly different. They don't invest in utility scale renewables like solar and wind. Instead, they're investing in things like carbon capture, biofuels, and hydrogen.
Why the difference?
The US majors have said they're not prepared to compromise returns to make this pivot towards renewables. They're saying you can have high returns and low carbon. And then along comes the Inflation Reduction Act and in that there's a lot of very generous tax credits.
In the last few weeks, Exxon has said that by 2027 20 per cent of its capex is going on clean energy. They’ve played quite a good game. They've held back, now they've got the tax credits, now they can meet their investment returns. So they’re beginning to unleash the dollars.
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