Oil markets look primed for a new up-cycle by 2022, which could culminate in Brent surpassing $80/bbl. This is sufficient to unlock 20% IRRs on the next generation of offshore projects, and thus excite another cycle of offshore exploration and development. Beneficiaries include technology leaders among offshore producers, subsea services, plus more operationally levered offshore oil services. The idea is laid out in our 17-page note.
Our oil market outlook is detailed on pages 2-5, seeing 2Mbpd of under-supply by 2022 and a potential inventory draw of 2.5bn bbls.
>$80/bbl oil prices are needed to instigate a new offshore cycle, as modelled and explained on pages 6-9.
Can’t the next oil cycle be quenched purely by ramping up short-cycle shale, instead of another offshore cycle? We answer this pushback on pages 10-11.
Is another offshore cycle compatible with the energy transition and global decarbonization? We answer this pushback on pages 12-13, with detailed data on CO2 emissions per barrel offshore versus elsewhere.
Who benefits? We present the technology leaders among producers, service companies and emerging technologies on pages 14-17, drawing on our prior patent screens and technical research.
Another devastating impact of COVID-19 may still lie ahead: a 1-2Mbpd upwards jolt in global oil demand. This could trigger disastrous under-supply in the oil markets, stifle the economic recovery and distract from energy transition. This 17-page note upgrades our 2022-30 oil demand forecasts by 1-2Mbpd above our pre-COVID forecasts. The increase is from road fuels, reflecting lower mass transit, lower load factors and resultant traffic congestion.
Upgrades to our granular 2020-2050 oil demand models, including headline numbers, are outlined on pages 2-3.
Travel demand that will never come back is described on pages 4-5, including remote work, a shift to online retail and lower business travel. Our forecasts for higher oil demand are not based on a Panglossian recovery of travel habits to pre-COVID levels.
The shift from mass transit to passenger cars is detailed on pages 6-9, covering ground-transportation (buses and train), mid-range air travel, and reverse urbanization enabled by remote working.
Load factors are lightly reduced, requiring more cars to service each passenger-mile of travel, as outlined on page 10.
Higher road traffic dents fuel economy, which we have quantified using real-world data from the City of New York, also drawing on data from prior oil downturns, on pages 11-14.
Implications for oil markets, companies and the energy transition are discussed on pages 15-17.
It is possible to decarbonize all of global energy by 2050. But $30/bbl oil prices would stall this energy transition, killing the relative economics of electric vehicles, renewables, industrial efficiency, flaring reductions, CO2 sequestration and new energy R&D. This 15-page note looks line by line through our models of oil industry decarbonization. We find stable, $60/bbl oil is ‘best’ for the transition.
Our roadmap for the energy transition is outlined on pages 2-4, obviating 45Mbpd of long-term oil demand by 2050, looking across each component of the oil market.
Vehicle fuel economy stalls when oil prices are below $30/bbl, amplifying purchases of inefficient trucks and making EV purchases deeply uneconomical (pages 5-6).
Industrial efficiency stalls when oil prices are below $30/bbl, as oil outcompetes renewables and more efficient heating technologies (page 7).
Cleaning up oil and gas is harder at low oil prices, cutting funding for flaring reduction, methane mitigation, digitization initiatives and power from shore (pages 8-9).
New energy technologies are developed more slowly when fossil fuel prices are depressed, based on R&D budgets, patent filings and venturing data (pages 10-11).
CO2 sequestration is one of the largest challenges in our energy transition models. CO2-EOR is promising, but the economics do not work below $40/bbl oil prices (pages 12-14).
Our conclusion is that policymakers should exclude high-carbon barrels from the oil market to avoid persistent, depressed oil prices (as outlined on page 15).
Digitization offers superior economics and CO2 credentials. But now it will structurally accelerate due to higher resiliency: Just 8% of digitized industrial processes will be materially disrupted due to COVID-19, compared to 80% of non-digitized processes. In this 22-page research report, we have constructed a database of digitization case studies around the energy industry: to quantify the benefits, screen the most digital operators and identify longer-term winners from the supply chain.
Pages 2 outlines our database of case studies into digitization around the energy industry.
Page 3 quantifies the percentage of the case studies that reduce costs, increase production, improve safety and lower CO2.
Pages 4-6 show how digitization will improve resiliency by 10x during the COVID-crisis, stoking further ascent of energy industry digitization.
Page 7 generalizes to other industries, arguing digitization will accelerate the theme of remote working, esepcially in physical manufacturing sectors.
Pages 8-9 screen for digital leaders among the 25 largest energy companies in the world, based on our assessment of their patents, technical papers and public disclosures.
Pages 10-11 identify leading companies from the supply chain, which may benefit from the acceleration of industrial digitization; again based on patents and technical papers.
Pages 12-22 present the full details of the digitization case studies that featured in our database, highlighting the best examples, key numbers and leading companies; plus links to delve deeper, via our other research, data and models.
The COVID-19 crisis will structurally accelerate remote working. The opportunity is explored in our 21-page report. It can save 30% of commuter journeys by 2030, avoiding 1bn tons of CO2 per year, for a net economic benefit of $5-16k per employee. This makes remote work a materially more impactful opportunity than electric vehicles in the energy transition.
Remote work currently saves c3% of all US commuter miles, which comprise 33% of developed world gasoline demand (pages 2-4).
Remote work could save 30% of all commuter miles by 2030, structurally accelerating as the COVID-19 crisis changes habits (page 5).
Remote work, thus screens as more impactful than electric vehicles, as an economic opportunity in the energy transition (page 6).
Ecconomic benefits are $5-16k pp pa. Our numbers are conservative. They under-reflect productivity and wellbeing improvements in the technical literature (pages 7-8).
We stress test our numbers, looking profession-by-profession across the entire US labor force, and considering new technologies (pages 9-13).
Direct energy impacts save 1bn tons of annual CO2. Impacts on oil, gas and electricity demand are quantified, including evidence from the COVID crisis (pages 14-17).
Hidden consequences are more nuanced: reshaping mobility, urbanization and online retail habits (pages 18-21).
This 15-page note outlines our top three conclusions about COVID-19, which the oil markets may have missed. First, global oil demand likely declines by -11.5Mbpd YoY in 2Q20 due to COVID-19. This is over 15x worse than the global financial crisis of 2008-9, and too large for any coordinated production cuts to offset. Second, once the worst of the crisis is over, new driving behaviours could actually increase gasoline demand, causing a very sharp oil recovery. Finally, over the longer-term, structural changes will take hold, transforming the way consumers commute, shop and travel. (Please note, our oil supply-demand numbers have subsequently been updated here).
Pages 2-7 outline our new models of global oil demand and US gasoline demand, underpinning a scenario where oil demand likely falls -11.5Mbpd in 2Q20, and -6.5Mbpd YoY in 2020. In a more extreme downside case, declines of -20Mbpd in 2Q20 and 10Mbpd in FY20 are possible.
Pages 8-10 illustrate how gasoline demand could actually increase in the aftermath of the COVID crisis, once businesses re-open and travel resumes. The largest cause is a c25% potential degradation in developed world fuel economy per passenger, as lingering fears over COVID lower the use of mass transit and vehicle load factors.
Pages 11-15 outline our top three structural trends post-COVID, which will persist for years, transforming retail, commuting, leisure travel and the airline/auto industries.
Please don’t hesitate to contact us, if you have any questions or comments…
It is often said that Oil Majors should become Energy Majors by transitioning to renewables. But what is the best balance based on portfolio theory? Our 7-page note answers this question, by constructing a mean-variance optimisation model. We find a c0-20% weighting to renewables maximises risk-adjusted returns. The best balance is 5-13%. But beyond a c35% allocation, both returns and risk-adjusted returns decline rapidly.
Pages 2-3 outline our methodology for assessing the optimal risk-adjusted returns of a Major energy company’s portfolio, including the risk, return and correlations of traditional investment options: upstream, downstream and chemicals.
Page 4 quantifies the lower returns that are likely to be achieved on renewable investment options, such as wind, solar and CCS, based on our recent modeling.
Pages 5-6 present an “efficient frontier” of portfolio allocations, balanced between traditional investment options and renewables, with different risk and return profiles.
Pages 6-7 draw conclusions about the optimal portfolios, showing how to maximise returns, minimise risk and maximise risk-adjusted returns (Sharpe ratio).
The work suggests oil companies should primarily remain oil companies, working hard to improve the efficiency and lower the CO2-intensities of their base businesses.
Prioritising low carbon barrels will matter increasingly to investors, as they can reduce total oil industry CO2 by 25%. Hence, these barrels should attract lower WACCs, whereas fears over the energy transition are elevating hurdle rates elsewhere and denting valuations. In Guyana’s case, the upshot could add $8-15bn of NAV, with a total CO2 intensity that could be c50% below the industry average.
Pages 2-3 introduce our framework for decarbonisation of the global energy system. Within oil, this requires prioritising lower carbon over higher carbon oil barrels.
Pages 3-6 outline the economic value in Guyana, which is now at the point where it is hard to move the needle with further resource discoveries.
Pages 7-8 show how lower WACCs can be trasnformative to resource value, even more material than increasing oil prices to $100/bbl.
Pages 9-17 outline the top technologies that should minimise Guyana’s CO2 emissions per barrel, including flaring policies, refining quality, midstream proximity, proprietary gas turbine technologies from ExxonMobil’s patents and leading digital technologies around the industry.
Our conclusion is that leading companies must deepen their efforts to minimise CO2 intensities and articulate these initiatives to the market.
Precision-engineered proteins are on the cusp of disrupting the meat industry, according to an exceptional, 75-page report, published recently by RethinkX. The science is rapidly improving, to create foods with vastly superior nutrition, superior taste and superior costs, by the early-2020s.
The energy opportunities are most exciting to us, after reading the report. If RethinkX’s scenarios play out, we estimate: direct CO2 savings of 400MTpa, enough to offset 10% of US oil demand; 2bcfd of upside to US gas demand; and enough land would be freed up to decarbonise all of US oil demand, or increase US biofuels production by 6x to c6Mbpd.
We would be delighted to introduce clients of Thunder Said Energy to the reports’ authors, Catherine Tubb and Tony Seba. Please contact us if this is useful.
Many commentators fear long-run oil demand is on the cusp of a steep contraction, leaving oil and gas assets stranded. We are more concerned about the opposite problem. Projecting out the current trends, global oil demand is on course to keep rising to over 130Mbpd by 2050, undermining attempts to decarbonise the world’s energy system.
Our new, 20-page note reviews seven technology themes that can save 45Mbpd of long-term oil demand. We therefore find oil demand would plateau at 103Mbpd in the 2020s, before declining gradually to 87Mbpd in 2050. This is still an enormous market, equivalent to 1,000 bbls of oil being consumed every second.
Opportunities abound in the transition, in order to deliver our seven themes, improve mobility, substitute oil for gas, reconfigure refineries for changing product mixes, and to ensure that the world’s remaining oil needs are supplied as cleanly and efficiently as possible. Leading companies will seize these opportunities, driving the transition and earning strong returns in the process.