Energy Industry Insights: The future of the oil and gas sector

VO: This audio feature is part of DNV’s 14th annual Energy Industry Insights study. It is produced by FT Longitude in partnership with DNV.

Steve Edwards:

Organizations in the oil and gas sector are on a strong recovery trajectory following the extreme conditions of 2020. Demand for oil and gas remains high, and the sector is investing to develop reliable sources of supply.  

In fact, DNV's Energy Industry Insights research reveals that optimism is at a five year high, with 68% of oil and gas professionals confident about sector growth in the year ahead. 

Is this optimism about traditional oil and gas profits, or progress in the transition to a cleaner and leaner industry? Is high confidence here to stay? And how are today's oil and gas leaders preparing their organizations for a low carbon future? 

I'm Steve Edwards, senior editor at FT Longitude. In this special episode of DNV Talks Energy podcast, we're exploring the big questions surrounding the future of the oil and gas industry, and joining me to discuss this is Michael Cohen, Chief U.S Economist and Head of Oil and Refining at BP. Michael, thanks so much for joining me. 

Michael Cohen:

Thanks, Steve, and thanks for having me on this programme. 

Steve Edwards:

Michael, you have a wealth of experience assessing the short, medium, and long-term outlook for the oil and gas sector, so it would be great if you could begin by sharing your perspectives on recent supply and demand dynamics, and how these have been impacted by geopolitics? 

Michael Cohen:

I think a couple key points here is that first we've seen a lot of bullish geopolitical sentiment, a lot of unrest obviously in the Middle East between Russia and Ukraine. That has at various points in the last year raised prices, but for all commodities. And it's also created quite a bit of changes in market positioning. So not necessarily all of which was necessarily fundamentally driven, in other words, just concerns over that geopolitical unrest. So that in effect raised prices. It also has created some sharp moves both upwards and downwards. We've also seen lower refining margins, so Russia and Ukraine and the conflict there created some unplanned outages across the world and most importantly in Europe. That increased the likelihood that we would see throughput reductions, but it didn't actually happen, so those refining margins have now started to fall away.  

At the same time, we've seen pretty robust natural gas supply and that has pressured natural gas prices coming into the summer when we should see an uptick. So seasonally speaking across the markets, we're expecting a pretty healthy ramp up in through the summer for both oil and for natural gas; oil for summer driving season and natural gas because of natural gas for power burn. In both cases, that uptick hasn't really happened. So, on the oil side that's resulted in OPEC having to keep some of its cuts in place for longer, and it's tightened the market more so than otherwise.  

Steve Edwards:

You mentioned market positioning changes. Could you elaborate a little bit on that, and in particular, whether these are temporary, opportunistic or more long term?  

Michael Cohen:

Yeah, I would say that they're more tactical. I don't think that much of the market moves that we've seen over the last two to three months have been necessarily from long-term investors changing their view on the markets. It's more tactically speaking, beginning of the year positioning across the various risk assets. It's not necessarily something that's necessarily long term. But I think the broader picture remains, which is that market participants react to the fundamental signals. The fundamental signals in the first quarter of the year seemed bullish to those market participants and they therefore adjusted their positioning accordingly. 

Steve Edwards:

The longer-term trajectory is, of course, towards lower carbon energy, and this necessitates a reinvention or an evolution of oil and gas industry participants of all kinds. In your view, is the focus on those, that long-term transition something that has slowed down in recent years, or is it just still very firmly in the crosshairs? How do you see that, how those ambitions have changed? 

Michael Cohen: 

The low carbon hydrogen, synthetic biofuels, carbon capture and storage, investments in those kinds of technologies remain at a very, very early stage, I would say. As an example, in 2024, at the beginning there were fewer than five million tons per annum (MTPA) of low carbon hydrogen projects that were operational or under construction. That's a very, very, very small fraction of the existing use of unabated fossil fuel-based hydrogen. So, we're talking about very, very small levels. We did see sales of heat pumps grow pretty steadily, especially in the EU and in North America. 

Sales increased 75% in the EU between 2019 and 2023. And on the transportation side of the spectrum, we've seen very rapid growth in EVs. Just as a way of putting this in context, we had forecasted the types of EV penetration, the share of sales at this point that we wouldn't have expected to see for another two years. So, we're already two to three years ahead of the curve in terms of what we expected in terms of share of sales.  

So, I think that what's really changed is that over the course of the last two years, we've seen this, the war on Ukraine, the conflict in the Middle East, and it's increased government's attention on the energy security and affordability elements of what we would call the energy trilemma. And so, what that has meant is an increasing focus on energy efficiency, growing domestic energy supplies. I think you could also expect that over the course of the next several years, that governments may end up having the licence from their constituents to focus more on the design and operation of different energy markets. So that's why we've seen industrial policy focus, that's why we've seen increasing focus on enhancing supply chains and how to enhance those, and also fossil fuel resources that are in that country. 

Steve Edwards:

It's an interesting balance that needs to be struck, I mean in many areas, but just talking about capital, presumably every big oil and gas company has to balance how much they invest in upstream oil and gas and more increasing supply and their new energy business. Do you have concerns about the supply stability for oil and or natural gas over the next five years or so? 

Michael Cohen:

Yeah, so I guess what I would say is that when we look at the investment trends for oil and for natural gas, we see the annual requirements for a scenario similar to our current trajectory scenario as being very much in line with the investment levels that we've seen in very recent years. So over the last two to three years, 400 to 500 billion was invested in traditional oil and gas upstream resources. And in a current trajectory scenario, it's roughly the same on a real basis—out through 2030, it's the same amount of investment required based on our analysis. And I would say the outlook is very much trying to make the point that investment levels right now are sufficient to meet the expected demand that is expected to be in place by 2025 and 2030. 

Now, there is, as you know, a very wide range of demand expectations. If we saw the demand profile associated with, for example, OPEC's view or some of our peers have views on what the level of oil demand might look like in 2030 or '35, then yes, we would need to see a slight uptick in the amount of annual investment in order to make ends meet. But at the same time, there's just as likely a scenario that could lead to much lower oil demand by the time we get into the 2040 or 2050 timeframe. And then that belies the uncertainty that I think faces many producers and investors in these long-term assets. Because if that source of hydrocarbon is not fit for purpose for the world that is seeking to get onto a lower carbon pathway, then you can end up with a stranded resource or a resource that is priced accordingly in that type of world. 

And so, I think that's obviously a risk. And when the oil demand trajectory in 2050 varies by 60, 70 million barrels a day, that's a huge risk. What I would say is that even in scenarios aligned with a net-zero scenario, there's still a requirement for 70 to 80 million barrels a day of oil to be demanded in those types of scenarios. And so, if you do the decline rate analysis it means that if you stopped investing today, you would clearly end up with a shortfall. If you just allowed mature resources to keep producing and not sanction any new oil and gas, even in that net zero scenario, you would end up with a shortfall by 2035. So, I think that's an important point to take away. 

Steve Edwards:

Because I suppose there's a political side to it and there's a public opinion about new oil and gas projects can cause controversy. And is there a risk that policies are going to lead to discouraging oil and gas investment to the extent that we don't have an orderly transition? 

Michael Cohen: 

Yeah. I think there are real concerns that we may end up with a disorderly transition. And one of the scenarios that we talk about in our outlook is the prospect of a delayed and disorderly transition. There it's sort of the opposite of what you're saying. So, it's more meant to try to understand, well, if the world invests too much or if oil demand and natural gas demand remain too high and we don't have sufficient policies on the demand side to start to bring overall emissions lower, we're going to end up blowing through the carbon budget of even a two degree type of scenario. So, the disorderly transition in that light is one in which we have a finite carbon budget and we end up with societal unrest at the prospect of staying on our current trajectory. And then there's demands from society to get onto a lower carbon pathway faster than we would otherwise do if we started now. And the point of that scenario is just to say, the longer that we wait, the more costly that transition will be.  

The disorderly transition that you're talking about is one that is just as likely and just as possible where you end up with a mismatch between supply and demand. We saw that mismatch, even just a perceived mismatch in the Russia Ukraine conflict. And look at the types of volatility that created in terms of price. So in that sense, we need to have, as our outlook has talked about in years past, we need to have policies that operate as much on the demand side as they do on the supply side—in order to ensure an alignment between supply and demand—so we don't end up with the type of energy price, volatility and inflationary pressures that we sought over the last two years as a result of the Russian Ukraine war. 

Steve Edwards:

Trade-offs and balance, but so many moving parts in the energy transition and so many different technologies. It's hard to see it all coming together. But just finally, from a business perspective, what are the biggest risks that you would be concerned about in the next year or two in the industry? 

Michael Cohen:

When we think about the growth in electricity demand that we've seen over the last couple of years, the system is increasingly electrifying. When we think about the transportation sector, the industrial sector, and that electrification has been happening in emerging economies as well, and that as a result of improved accessibility, improved affordability as well. But when we think about where the electricity demand is likely to come from in developed economies, you're looking at developed economies whose electricity demand has basically been either flat or declining for the last several years. And now with data centres and reshoring of manufacturing centres, that electricity demand growth is inflecting upward at a very quick pace.  

So, what worries me is that the fossil fuel-based system is the one that is there, available to ramp up most quickly in the face of rising electricity demand. So, if we don't figure out a way to scale up renewables as quickly as that demand is increasing, you're going to end up with a higher emissions intensity of those power systems rather than moving in the opposite direction. And I would say there's significant infrastructure and governance problems when it comes to power markets, planning, permitting, very, very long lead times in terms of getting approval for some of those renewables projects. And so that's a big concern in terms of the overall emissions trajectory.  

When we think about the investment in critical minerals that are required both for transportation and for grids and the expansion of grids, we really need to see that be able to accelerate further, and it is going to be humbled and slowed by these supply chain issues that we've been facing over the last two years, and the concentration of some of those critical mineral supply chains in one particular country, that brings it into the face of national security concerns as well. 

Steve Edwards:

Really interesting talking to you as always.

Michael Cohen:

Thanks, Steve. 

VO: This audio feature is part of DNV’s 14th annual Energy Industry Insights study. It is produced by FT Longitude in partnership with DNV.