Oil and gas producers have been buoyed by higher oil prices, but leaders face a host of challenges, including technology adoption, climate change and public distrust.
Like its manufacturing partners, the energy industry is going through a period of transformation as it copes with market, technology, regulatory and societal challenges. Discussing them this week were more than 2,500 leaders from the oil, gas, manufacturing and utilities industries gathered in Houston for the annual CERAWeek by IHS Markit energy conference. Here are 10 themes that ran through the conference.
- Optimism returns. The gloom of last year’s meeting lifted just as the price of a barrel of oil, which has risen from below $27 in early 2016 to around $50 as CERAWeek started. With higher prices, the U.S. shale business “is back in business and starting to grow again,” said John Hess, CEO of Hess Corp. The number of rigs drilling oil had grown to 756 on March 3, according to the Baker Hughes Rig Count, from 489 a year ago. And, Hess noted, companies have found ways to cut drilling time, reduce costs and get more oil from reservoirs. “When shale went down, American ingenuity went up,” he said.
- Demographics are in our favor. The global population is expected to grow from 7.3 billion in 2015 to 9.7 billion in 2050. Moreover, a Brookings Institution report recently noted, “We are witnessing the most rapid expansion of the middle class, at a global level, that the world has ever seen.” Those trends, said Khalid A. Al-Falih, minister of Energy, Industry and Mineral Resources of Saudi Arabia and chairman of Saudi Aramco, mean “global energy demand will grow significantly despite advancing technology and gains in energy efficiency which are leading to lower energy intensity.” Renewable energy sources and use of electric cars will grow, he observed, but as a recent trip to China and Malaysia demonstrated, “neither climate change policies nor technology shifts has quenched their insatiable thirst for oil.”
- Getting on the right side of climate change. While their enthusiasm for the topic varied, industry executives were uniform in their statements that climate change is here and must be addressed. “We understand the risk to climate with fossil fuels,” said ExxonMobil CEO Darren Woods. “We think we have the opportunity to mitigate that risk with technology.” He said it was wrong to think that “affordable energy and a cleaner environment are a zero sum game.” Woods said technologies ranging from carbon capture and storage to lighter, stronger polymers to tighter controls in refinery operations offered the path to a lower carbon future. “The only way to keep winning in a competitive market is to keep innovating,” he said.
- The hunt for peak demand proves, well, demanding. Last November, Royal Dutch Shell broke ranks with many oil firms when it forecast that demand for oil could peak in 5 to 15 years. Al-Falih, the Saudi Arabian oil minister, said projections for peak demand were “misguided” and could discourage the “trillions of dollars” of investment needed to develop oil and gas supplies for the coming decades of growing oil demand.
- Sensible regulation needed. Regulatory reform is one of the issues President Trump’s Manufacturing Council is focused on, said David Farr, CEO of Emerson. EPA Administrator Scott Pruitt said he would ensure that processes such as the Administrative Procedures Act are followed, the statutory framework for regulations was followed and EPA would practice “cooperative federalism” with the states. Jesse Norman, MP, Parliamentary Under Secretary of State at the Department for Business, Energy and Industrial Strategy, pointed out that the U.K. was following a policy of removing two regulations for every new regulation promulgated, a policy Trump has expressed support for. But Norman noted, in the fight against red tape, “Red tape is putting up a hell of a struggle.”
- Value, value, value. Last year, the byword at CERAWeek was efficiency as oil companies sought to slash expenses. At this week’s conference, industry executives such as Occidental CEO Vicki Holub stressed the need to “focus our efforts and our investments in the areas that would give us the best returns.” Occidental has reduced its operations from 28 countries to a half dozen and also narrowed its U.S. focus to the Permian Basin. In the near term, she said, the company will be able to restore production levels to what they had been before shedding these assets but do so at “a much higher return.”
- Natural gas is the one we love. Oil and gas firms are investing in gas fields, pipelines and processing facilities to take advantage of the benefits natural gas offers – strong demand from customers and lower impact on the environment. Saudi Arabia’s Al-Falih said Saudi Aramco was working to “double our gas capacity” while keeping up capital spending on crude oil.
- Technology at every point in the business. From new drilling techniques to broader use of data analytics, new technology was on the minds of oil executives who remain cautious about the volatility of petroleum prices and will continue looking for ways to improve margins and reduce operating costs. For suppliers such as Schneider Electric, said Peter Herweck, executive vice president for Industry Business, they are moving from being component suppliers to working as partners to providing automation and specific software solutions so that energy companies can improve productivity all through the value chain. IoT connectivity and analytics are viewed as avenues to enterprise improvements, not just specific processes. “Maybe big data is the next big technological innovation after shale,” observed Daniel Yergin, the vice chairman of IHS Markit and chairman of CERAWeek.
- Public relations has not been our forte. After major accidents such as the Deepwater Oil spill of 2010 and concerns about climate change, oil executives acknowledge they have lost trust with segments of the public. “Oil and gas has a bad name,” said BP CEO Robert Dudley. He said it was unfortunate the industry had been “vilified a bit” in the U.S. and Europe because it is the “engine that creates jobs and prosperity.” Chevron CEO John Watson said he would like to see a “more open and honest exchange” on issues rather than “apocalyptic predictions and vilification of anyone that suggests different policy measures for the concerns that are out there.”
- Power to the people. Much of the existing electrical grid was designed 100 years ago to “move electrons from large power plants in one direction to its customers,” noted Pedro Pizarro, president and CEO of California-based utility Edison International. Now a transformation is underway where a two-way digitally enabled grid will be needed to manage hundreds of thousands of power sources as consumers install solar panels. Pizarro told CERAWeek attendees 4,000 to 5,000 customers a month are installing solar panels. He said California was on a path to 50% of electrical power from renewables and that was displacing a lot of traditional power generation.