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Where is E & P Heading?

To think about energy coming from fossil fuels, it is important to understand the use of oil, natural gas, and their offset - renewables. As seen below, about 60% of oil consumption is used in transportation (outer circle). The 2nd circle shows oil end product in mb/d (millions of barrels per day consumption, later on “mmb/d”).


Renewable resources currently account for a very small share of electricity generation in the OECD. One of the key trends in this group is the switch from coal to natural gas. Coal is the most carbon-intensive resource used in utility-scale power generation. It is in decline, but at varying rates around the world. The switch from coal in the U.S. has proven to be a rapid solution to the reduction in CO2 emissions, as just six years ago coal’s share of electricity was 40%.


Globally, however, coal still represents about 40% of the electricity mix, more than any other resource. Projects for coal-fired utilities have been increasingly canceled in both China and India, but projects currently under construction still represent over more than half of total coal-fired electricity in the U.S. As coal-fired plants in the rest of the world are phased out, they are being replaced by a combination of wind, solar, biomass, and natural gas; natural gas representing about 1/3 of the replacements. Net, net, expect coal to be in decline on a global basis around the middle of this decade. A plus for climate change, no doubt, but a call on demand for natural gas, and of course, renewables.

Energy-related CO2 emissions in the U.S. declined by 3% in 2019, largely due to the changing resource mix of electricity generation 


  • Emissions from coal declined by 15%.

  • Emissions from natural gas increased by 7%.

  • U.S. electricity emissions are down by a third in the past twelve years.

  • Carbon intensity of electricity has declined sharply from 619 (2005) to 408 (2019) metric tons per kilowatt-hour.

But the future of energy demand is significantly less impacted by the OECD than by developing economies. The IEA 2019 World Energy Outlook showed, considering all forms of energy, consumption in India is expected to double in the next thirty years and the African continent is expected to add 1.2 billion people by then, with about half of them living in urban settings. In other words, there will be a massive increase in worldwide energy demand in the next several decades, with little of it coming from the OECD.

The IEA projected three scenarios for oil demand in the next two decades. On the graph below, “Current Policies” represents all activity across all countries in place today to reduce oil consumption. “Stated Policies” represents all countries and their projected plans to try to reduce oil consumption. “Optimistic” is the IEA’s view on how oil consumption might be reduced. They have combined these forecasts with demand (left scale) and price (right scale), which shows oil prices ranging from $60 to $120/bbl.


Globally, the demand for energy, specifically oil, comes from population growth.


One might question where the oil will come from to meet future demand. Oil production in 2000/2017/2019 was about 77/95/100 mmbbl/d. But the COVID-induced demand drop has caused a reduction in future investment of over 25% by oil companies, which will have a significant effect upon future production, especially in the U.S., where a large portion of world demand increase was covered by non-conventional oil production (fracking). Note also that 40% of worldwide producing oil fields are 40 years and older, and in a steady state of decline. New methods of oil production (stimulation) have stemmed the decline in older oil fields, but many sources point to the fact that these fields are nonetheless, in decline. The chart below shows the USD investment by companies in oil production (left scale) pre and post reduction in investment decisions, and the percentage of reduction (right scale). Many cancelled projects will never come to fruition, and future projects will be driven by oil prices, which at $40/bbl will not encourage much FID.

At look at the impact U.S. production has had on world oil supply is instructive. Over 90,000 non-conventional shale oil wells have been drilled in the U.S. since 2000. In 2018 alone 12,000 wells were completed. Because these types of wells produce a great deal of their reservoir oil in the first two years (rapid decline rate), 40% of 2018 well completion activity was used to keep production constant. As analysts Goerhing and Rozencwajg have often stated, during the past few years, shale wells have been high-graded. That is, the most promising wells have been completed leaving less productive reservoirs to be addressed later. Production in the U.S. had filled a 12mmbbl/day gap between world consumption and world supply.

  • This points to the obvious – supply destruction and increased consumption will cause oil prices to rise. Rystad projects that delayed and cancelled investments will result in a 6mmbbl/d reduction of world supply by 2025.


In reviewing the 100 most commercial U.S. non-conventional oil fields, the chart below shows that $35 to $40/bbl is about breakeven, sans profits! Oil prices will have to rise for production destruction to cease and capital beyond steady-state is deployed.


Won’t Electric Vehicles resolve all CO2 issues? The transition is coming, slowly, and is a transition to be sure, but this is not going to happen overnight, rather, gradually over the next few decades. Several Wall Street analysts and the IEA have projected that oil demand destruction from EVs may reach about 2mmbbls/day by 2030. This assumes that all stated goals of oil consumption reduction are met by all countries. These sources also point out that to reach EV projected penetration will required significant outlays in public transportation.

One of the biggest impediments to EV adoption is electric power infrastructure. While there may be a faster transition to EVs and their 2mmbbls/day demand destruction in the OECD, most transportation growth will come from outside the OECD, where infrastructure for electricity is highly challenged. There are power infrastructure issues within the OECD as well, albeit not as serious as those in the developing countries. A great deal of electricity, as mentioned above, will be coming from natural gas, which is often a by-product of oil production. Hence, not only will oil production need to increase to address the developing world, but natural gas will also need to increase to address the electricity needs of both the developing world and the OECD.

Many projections in favor of a rapid EV adoption require battery costs to drop further. Current costs are reported at $156/kWh and have come down rapidly in the past eight years. However, as the chart below shows, the “easy” gains in cost reduction have occurred. Further, it is questionable if EV long-haul trucks will gain market share given the weight to power trade-offs and the issues of distance on a charge. Fuel cells are a decade away, and green fuel cells, where the production of hydrogen comes from renewable resources, are many years out.


For further information on battery costs one might read Steve Levine’s The Powerhouse: Inside the Invention of a Battery to Save the World.

Today there are 1.4 billion cars on the road worldwide, which grew from 1 billion cars in 2009. The IEA projects a 50% increase in the next decade, that global freight will grow by 90%, and that other fuels will grow by 50%. To put this in perspective, the IEA reports there are 6 million EVs on the road today. If EVs grew by 25% per year, there would be 55 million by 2030.

In summary:

  • Oil demand will grow as world population grows.

  • Natural gas will supplant coal as a fuel of choice, along with renewables.

  • Electric Vehicles will impact world oil demand by up to 2% in the next two decades.

  • Supply destruction will yield a gap in the oil supply / demand equation.

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