The changing dynamics of Global Oil Economics (Part 3)

– What is the likely lifespan of Guyana’s Oil Industry?

Continuing from last week’s column: (2) Australia will be installing a record-breaking amount of solar power in 2018, which is three times more than it did in 2017; and will increase its solar capacity by 70 percent in 2018. This outcome is driven by soaring electricity costs in Australia; (3) India has built an airport that runs on solar power; (4) Norway wants all its internal flights to be 100 % electric by 2040. It will launch its first commercial electric air route by 2025; (5) The Netherlands hopes to build the largest offshore wind farm in the world by 2027, along with 2.3-square-mile artificial island to support it; (6) China is investing US$360 billion in renewable energy by 2020, and is leading a global green revolution. China is the largest producer of solar power; the Chinese have installed more wind capacity than the U.S, India and Germany combined, and has the world’s largest hydroelectric power plant (Cited from the World Economic Forum).
Among the top three nations, China is the undisputed renewable growth leader, accounting for over 40 % of total global clean energy by 2022. This is due to meeting various capacity targets, and addressing concerns about the country’s air pollution. In recent months, China has deployed a number of novel technologies designed to clean the air, including a 100-metre-tall smog-sucking tower in the city of Xian. The country has also surpassed its solar panel target for 2020, and according to the IEA, China is expected to exceed its wind target in 2019. China is also the market leader in hydropower, bioenergy for electricity and heat, and electric vehicles (World Economic Forum).
Moreover, the cost of renewable energy sources like wind and solar continue to fall drastically, and it was only a matter of time before they were cheaper than fossil fuels. The International Renewable Energy Agency (IRENA) believes that this will happen by 2020, price could be as low as three cents (USD) per kilowatt-hour for onshore wind and solar photovoltaic projects over the next two years (World Economic Forum).
More interestingly, with respect to upstream oil costs, according to a study done by the U.S Department of Energy on the ‘Trends in U.S Oil and Natural Gas Upstream Costs’ and published in March 2016, it was found that, “the full cycle project economics, after taking into account operating cost and the fiscal system under the late 2014 cost environment, most of the deep-water current and future projects are forecast to be uneconomic at oil prices below US$50/bbl. However, from a forward development perspective, most of the U.S deep water projects will go forward, as a significant amount of capital has been invested and operators are vigorously renegotiating their respective contracts to secure the lower rates.”

Concluding Remarks
Taken together, given that major countries are already accelerating climate change policies designed, of course, to transition from a fossil fuel- driven energy system to renewable energy, one can observe that all of these, combined, amounts to hundreds of billions in U.S. dollars to fuel these massive investments, which ultimately means that these developments are going to have a direct impact on global oil prices, which are eventually going to be on a downward trajectory. In that scenario, the ultimate effect would be that global demand for crude oil will fall steadily until it will reach a point where it will no longer be feasible. In other words, within the next two decades or so, oil prices will crash, and this is quite inevitable within the context of the changing dynamics of the global energy market; and hence such an outcome will mark the demise of a once lucrative global oil industry.
What this means for Guyana is that, (1) it is against these very backgrounds that ExxonMobil and other oil companies in general, will aggressively seek to negotiate oil contracts leaning more in their favour, since such investments are huge and extremely risky; and, (2) there is no doubt that there exists a great degree of uncertainty surrounding future oil prices. However, with reasonable certainty, one can safely presume that there may be a safe window period of another decade – maximum another two decades – in which crude oil will remain at sustainable prices. It is within this context that the oil companies would need to scale up production capacity – expeditiously – to 500,000 and even 1,000,000 barrels per day – at least within the first decade as well.
And finally, against the background of the analyses presented within this series of articles on this subject matter, it also means – conclusively – that Guyana’s oil industry is very likely to have a lifespan of only twenty years, and not forty as others may tend to think or predict.

*The Author is the holder of a MSc. Degree in Business Management, with concentration in Global Finance, Financial Markets, Institutions & Banking from a UK university of international standing.