The 3 major risks keeping oil executives up at night
Ben van Beurden
CEO, Royal Dutch Shell
Oil prices may have enjoyed a nice bump in recent months, but significant risks that could derail the industry still loom large.
That is one of the key takeaways from the International Petroleum Week in London, where more than 1,500 senior energy executives met to discuss the trends and outlook for the industry. While the delegates struck a relatively upbeat note on the future, they also pointed to a range of challenges that threatening their businesses.
Executive vice president at Norwegian oil giant Statoil STL, -1.00% Jens Økland, formulated a list of key challenges, which all were echoed throughout other speeches at the conference:
Oil executives have admitted they let costs run a bit out of control back when oil was still trading above $100 a barrel. Bernard Looney, chief executive for BP’s BP., -0.17%BP, -0.09% upstream business, said the typical costs of running a North Sea facility were pushed up by 72% between 2000 and 2013 because of the industry’s own practices, including project management costs, lower drilling productivity and extra documentation requirements.
But with prices nowhere near returning to their former glory, costs need to come down, he said. Crude oil CLJ7, +1.12% have been stuck in a range of around $55 a barrel in recent weeks, with concerns over rising U.S. production keeping a lid on prices.
Read: Why oil experts think OPEC’s U.S. headache won’t go away this year
“It’s a buyers market. There is more than enough supply to meet demand. Instead of consumers competing to access supply, in many way producers are competing to meet demand. And we must not lose sight of that. Especially just now with prices looking to have stabilized a bit above where they were last year,” Looney said.
Read: Why oil prices will never return to $100 a barrel, in one chart
Økland noted that the industry has already worked really hard to reduce expenses after oil prices crashed. Using his own company as an example, he said Statoil has cut the break-even price from $41 last year to around $27 now.
Still, industry executives believe they will need to do more to trim costs to stay competitive.
Renewables and climate change
Aside from grappling with oversupply from its own ranks, the oil sector is also focusing on the threat coming from renewable energy. While energy demand is still expected to rise for decades to come, more of that demand is forecast to come from clean energy sources, such as wind and solar, according to the delegates at the London conference.
BP estimates that around half of the increase in the world energy demand will come from non-fossil fuels. By 2035, 10% of the energy mix will be renewables, up from 3% today, according to BP’s energy outlook.
“For the first time, there’s real competition from not just within the oil industry, but also from other energy sources,” Looney said.
Renewables are expected to make up 10% of the energy mix in 2025
OPEC’s Secretary-General Mohammad Barkindo also touched on the issue in his speech, saying climate change “obviously has the potential to affect energy demand, the overall energy mix and the future economy of oil.”
Read: OPEC chief Barkindo plays down threat from rise in U.S. oil output
Another major issue being discussed at IP Week was how to prepare for the possible policy changes in the U.S. Økland said the new presidential administration’s potential border-adjusted tax was among biggest questions for the sector.
Under the Republican’s proposed import-tax reform, imports would be heavily taxed while exports would be exempt. As a major oil importer—the U.S. consumes almost of fifth of all oil produced globally—the tax adjustment would essentially push up the price of oil in the country and provide a lift to U.S. producers.
Over time, however, there are concerns that such a scenario would drive other producers into a price war to find buyers for the crude they would usually sell to the U.S.
On top of that, the U.K.’s referendum to exit from out of the European Union, and risks surrounding the growth of populism and antiestablishment candidates, as well as other developments in emerging markets, are contributing to the policy risks for 2017, the Statoil executive said.