Oil industry on borrowed time as switch to solar and gas accelerates.

Ambrose Evans-Pritchard in the Telegraph: “The props beneath the global oil industry are slowly decaying. The big traded energy companies resemble the telecom giants of the late 1990s, heavily leveraged to a business model already threatened by fast-moving technology. Citigroup warns – or cheerfully acclaims, depending on your point of view – that world energy markets are entering a period of “extreme flux”, with oil caught in triple encirclement by cheap natural gas, much more efficient vehicles and breathtaking advances in solar power as scientists crack the secrets.”
“The combined effect is to “bend” to the curve of global oil use over coming years, eroding the assumptions that have underpinned a threefold rise in Western oil industry debt to $600bn since 2005, much of it to hunt for crude in prohibitively expensive places. Costs rose 9pc in 2012 and 11pc last year, according to the US Energy Department.
There may be little point battling icebergs to drill in the Arctic, or in trying to extract oil from the ultra-deepwater fields in the mid-Atlantic, beneath layers of salt, three kilometres into the Earth.
The “oil intensity” of global GDP has already halved since 1980s. We are becoming more frugal. Gasoline demand in the OECD rich states has been sliding in absolute terms since 2007, punctuated by ups and downs, but dropping overall from 15.5m barrels a day (b/d) of crude to 14m b/d.
Citigroup’s report – “Energy 2020: The Revolution Will Not Be Televised” – says the average efficiency of new cars in the US has risen by 4.6 miles per gallon (mpg) since 2008 under fuel economy mandates. It is still rising at a steeper rate. Gasoline demand will slide by 900,000 b/d in the US alone by 2020.
China has even more draconian curbs coming into force, with a 50mpg fuel economy mandate by 2020. Its output of electric cars is up 177pc in a year, and hybrids are up 567pc. India will reach 50mpg by 2021, Mexico by 2025.
….The US shale revolution has caused natural gas prices in North America to collapse. With a long delay, and by convoluted means, this effect is spreading to Asia, where liquefied natural gas (LNG) prices have halved this year.
In the end, oil must converge towards gas prices since vehicles can be designed to use either source, or both. The new Cummins Westport ISX 12G gas engine released last year competes directly with diesel. Natural gas lorries are expected to take around 4pc of the US market this year as new taxes and pollution laws come to bear.
It is possible that gas and LNG prices will converge upwards, rather than oil coming down. That seems unlikely. America’s gas ouptut has risen from 440 to 720bn cubic metres (bcm) in six years – 20pc of global production – and is still rising. The US Energy Department expects it to reach 960bcm by the end of the decade. These are huge volumes.
The Marcellus Region in Pennsylvania has multiplied output seven-fold in four years, with an accelerating surge over the past year as drilling technology gets better.
There is now speculation that the US will surpass Qatar to become the world’s top exporter of LNG by 2020. Australia is catching up – albeit at high cost – and it too is expected to triple LNG exports and overtake Qatar by 2020.
Even if global gas fails to deliver as expected, this will merely accelerate the powerful shift towards solar power already under way, eroding the demand for oil more slowly by a different means.
Citigroup said solar already competes in the growing regions of the world on “pure economics” without subsidies. It has reached grid parity with residential electricity prices in Germany, Italy, Spain, Portugal, Australia and the US southwest. Japan will cross this year, Korea in 2018. It forecast that even Britain will achieve grid parity by 2020, a remarkable thought for this wet isle at 51 or 52 degrees latitude.
The industry can at last tap a “large investor universe” through the market for asset-backed securities. It priced debt below 5pc last year. Some US electric companies are starting to build solar farms for hard-headed commercial reasons as a hedge against future shifts in the gas price. This is astonishing.
Roughly 29pc of all electricity capacity added in America last year came from solar. The story is by now well-known. A McKinsey study found that installed solar power in the US across all sectors has dropped from $6 a watt to $2.59 in four years, largely due to the collapse in the cost of solar cells.
The next leap in competitiveness will come from falling “soft costs”, currently 64pc of the residential solar price in America. This happened in Germany as scale built up, and is following in the US. In California you can sign up for solar panels in a supermarket, with no money down, and make a saving from day one.
The clinching shift will come when the battery storage is cheap enough and lasts long enough for users to draw down their suplus generated during the day to cover needs at night, opening the way for mass exodus from the grid, unless utilities harness it first to their own advantage.
There are at least 220 research projects into energy storage currently under way in the US, many funded by the US Advanced Research Projects Agency and other arms of the world’s scientific superpower. It is Hegel’s irony of history. We can now see that the oil price shock of 2008 was traumatic enough to draw an emergency response, bringing forward oil’s nemesis.
Harvard is working on an organic flow battery using quinones – from rhubarb – instead of rare earth metals. It hopes to cut battery costs by two-thirds within three years. Rivals at the University of Southern California think they can eventually slash the cost by 90pc below today’s lithium-ion batteries.
It is a fair bet that scientists will have conquered intermittency by the end of the decade, at which point the switch to renewables becomes a stampede. This is where great fortunes may be made, perhaps the mirror image of the wealth to be lost on fossil defaults.
Brokers Sanford Bernstein call it the new order of “global energy deflation”. Technology momentum is unstoppable, and one-way only.
Big Oil is trapped, gradually running down legacy reserves. The longer that geopolitical eruptions disguise this erosion of competitiveness by propping up prices, the more emphatic the shift to renewables. Yet if prices do drift down to $80 – as many expect – they will lose money on their exotic ventures.
The energy group Douglas-Westwood says half the oil industry needs prices of $120 or more to generate free cash flow under current drilling plans and shareholder dividends. Leverage may catch up with them, a risk flagged recently by Standard & Poor’s.
The oil-exporting states are also trapped. Russia needs crude prices near $110 to balance the budget. Natixis says the fiscal break-even cost for Iraq is $108, for Saudi Arabia $97 and the Emirates $89. Bahrain and Algeria are over $120.
Oil-patronage regimes violate the loose rule that societies with a per capita income above $10,000 become more tolerant, rational and pluralist over time, so we may be doing a favour for these nations if we curb our appetite for oil. Their revolutions may, however, be televised.”