July 13, 2017

Four Strategic Issues More Pressing than 'Peak Demand'

Stratas Advisors

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The concept of “peak oil demand” has been gaining more traction over the last year. While many long-term forecasts have long anticipated some slowing of demand as efficiencies improve and energy intensity falls, recent conversations about the viability of EVs has made peak demand feel more real and more imminent.  

While Stratas Advisors predicts a slowing of future demand in its reference case output due to a number of factors, demand “peaking” and actually showing a structural decline is likely decades away. Even with rapid penetration of EVs, major demand sources in shipping/trucking, aviation and petrochemicals are all going strong with little demonstration of a non-hydrocarbon alternative.

As such, discussions around peak demand, while important, are proving a distraction from key strategic shifts we are seeing along the entire oil and gas value chain. Peak demand is likely to happen someday, but long before that these four issues will emerge as critical concerns for oil and gas stakeholders – most of them are in fact already happening.  

Shifting product consumption mix – Products that have been the core focus of refiners (i.e. – gasoline and diesel) will not experience the same growth profile as LPG or jet fuel. Combined with a continued phase out of fuel oil consumption, refiners and pipeline operators will be faced with wider heavy-light product differentials and a need to retool existing infrastructure while producers are likely to see a shift in crude slate by refiners. This is not to mention intra-product dynamics like octane, sulfur specifications, and the increased penetration of biofuels.

Traditional E&P model under pressure – Traditional producers, (e.g. integrated oil companies) are squeezed between an ever-more efficient shale patch and resurgent resource nationalism in hydrocarbon rich nations. As access to stable, low-cost oil production areas is constrained traditional E&P stakeholders will need to radically shift their long term market strategy to see growth. Finally, the ability for these companies to deploy their plentiful capital nimbly and in reaction to structural market moves will present operational and tactical challenges.

The global rush to natural gas – In the US and around the world, demand for gas continues to ramp up. Despite the Trump administration’s withdrawal from the Paris Climate Accord, state-level regulations combined with economic coal plant retirements will drive higher US demand, while global demand for gas (and a supportive regulatory regime in key consuming countries) will drive higher LNG exports. The current forward market is not adequately reflecting this upcoming demand growth, setting the stage for a potentially sharp price correction.  

Key demand centers unable to keep up – Outside of China and India, key growth markets appear unable to develop domestic resources and infrastructure fast enough to keep pace with internal demand. LNG, crude and product exports to Southeast Asia will continue to rise, supporting longer haul shipping and widening geographic price spreads. 

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