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Insights across the energy value chain

Anyone who’s been in the oil business for more than, say, a month, knows how ridiculous it would be to confidently predict where oil and gas prices are headed.

Tensions in the Middle East, growing output from the Permian, offshore adds to reserves in Guyana and Brazil, uncertainty over tariff implementation, pipeline infrastructure buildout timing, tax policy implementation, legacy refinery crude quality limitations, storage builds, price of the dollar—these are just a few of the many drivers that affect wellhead pricing of oil and gas. It’s a thoroughly bewildering set of variables, and probably beyond the analytical capability of most mortals.

More often than not, our discussions and musings about oil and gas prices focus on supply.
So, I’m going to avoid putting on my dunce cap, but I am going to look at the demand side of oil and gas while questioning the assumptions we all make about hydrocarbon demand.

My guess is that most folks, when they think of future demand, envision the rest of the world achieving first-world status like Western economies did—through a drawn out industrialization process that required massive amounts of infrastructure and fuel to power the mobility of goods, services, and people.

We’ve certainly seen this in China and India, but are we considering the ways that technology can bypass the traditional routes to building wealth to “Western” standards?

Looking at cell phone adoption in Africa is instructive.

Over the course of just 12 years, South Africa has nearly tripled the number of its citizens who own a mobile phone, while Uganda increased its usage by a factor of seven!

Moreover, internet access is predominantly by smartphone, and although not yet dominant, smartphone ownership is projected to account for nearly 87% of all connections in sub-Saharan Africa by 2025.
The mobile overprint on the African economy is projected to add $45 billion to sub-Saharan GDP (https://www.gsma.com/r/mobileeconomy/sub-saharan-africa/).

Here’s a technology that has leapfrogged the old model of landlines—without needing tens of thousands of miles of copper, hundreds of thousands of poles, and unknown hours, days, and years of trenching—and the power consumption to mine, smelt, transport, and embed the infrastructure.

Not to mention that it’s bypassed the last-mile problem of fiber.

Although cost of ownership is a stretch for many in the region, as is the case with many competitive commodity technologies, the cost of cell phones is dropping in the region.

Fine and good, we might think, but what about the fuel needs across the world to get people from point A to point B, especially in nations with huge populations.

Let’s look at the demographics.

China’s population will start to decrease within seven to nine years, but India’s will certainly pick up the slack. From now until 2058 there will be a net add of approximately 140 million people to the population represented by these two countries over nearly 40 years. That’s roughly 3.5 million people per year.
That’s a lot of added people on our planet, and this addition to world population by itself might make us believe that world demand for fuels would increase inexorably.

African population growth, however, will dwarf the net gain from India, adding more than 1 billion people in the next 25 years, or roughly 40 million people per year.

So, problem solved, right? A developing middle class in China (although dwindling and aging) adds more than 1 billion people in the next couple of decades, and they’ll all need cars to get around, capiche?

Perhaps, but will new third-world miles traveled mimic the American model?

To drive anywhere you need decent roads. Having hitchhiked in 1979 through what is now called the Democratic Republic of Congo, I vividly remember waiting for hours at a washed out portion of the road from Bunia to Bafwasende while trucks lined up on either side of a 15-foot pothole and took turns winching each other through the mud. The distance between the two towns is about 230 miles as the crow flies, or roughly the same distance between Lake Charles, Louisiana, and New Orleans.

The two Google Map images below compare roads in the Congo vs. roads in southern Louisiana.

If the roads are not there to be driven on, the picture that emerges for Africa is a growing population with lagging infrastructure development to support increased mobility. In other words, unfulfilled demand.

Should we be comfortable in assuming that the demand for mobility options is limited to internal combustion vehicles?

Admittedly, EVs (electric vehicles) don’t yet account for huge market share of transportation options, but the trend is growing. Although EV ownership in the U.S. lags ICE (internal combustion engine) ownership, the market share for EVs in the U.S. is forecasted to achieve nearly 22% in six years.

Given that Volvo, Daimler, Volkswagen, Ford, GM, and other vehicle manufacturers are increasing their fleets of both passenger and truck vehicles—including long haul trucks—it’s not unreasonable to speculate that EVs will make up a significant portion of the global vehicle fleet. Even China is directing its domestic auto industry to increase the percentage of EVs in their fleets.

Bloomberg forecasts increases in global EV usage to be about 23% of global vehicle ownership by 2040.

Maintenance cost for EVs are about one-third of those for ICEs, and power costs per mile for an EV are about 50% of fuel costs for ICEs, so the total operating costs for EVs are about 16% of the cost to operate an ICE vehicle. This is significant consideration that no doubt factors into the decision to go EV vs. ICE.

All well and good, but where does the power come from? In poorer countries the availability of power from centralized power generation facilities is often meager.

This is being slowly addressed by sovereign nation investments in power development, such as China’s $46 billion investment in Angola’s Caculo Cabaca Hydropower project, and its $2.5 billion investment in Guinea’s Kaleta hydroelectric facility.

Will less affluent countries need the range we require in the U.S.? Although there has been a pronounced migration of rural populations to dense urban cores in search of employment and wealth, I can envision scenarios where local development powered by better solar and wind power options could occur.

If so, the need for EV range could be significantly curtailed, and the lower the range, the more affordable the vehicle.

Moreover, there are low-cost options. India’s Mahindra e20 vehicle sells for approximately $8,200—affordable, especially if several individuals pool resources.

As far as I’m concerned however, the black swan in the whole picture is our ability to innovate.

The graph below gives a sense of how powerful innovation feeds on itself.

Improvements in battery storage technology, dropping costs of solar, the internet of things, materials research into substances such as graphene, and even 3D printing of houses will be just part of the technological revolution that will unfold, with, as of yet, unforeseeable impacts in how we live our lives—including how we obtain and use BTUs.

The demand side for hydrocarbon fuels is probably stable over the next 10 to 15 years, but after that, I think there’s real chance that world markets will see demand begin to soften.

Disagree? Have an opinion? Please let me know at mnibbelink@drillinginfo.com.

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Mark Nibbelink

Drillinginfo Co-Founder, Director Of University Outreach. Before co-founding Drillinginfo in 1999, Mark had a long career as a prospect geologist at Gulf Oil before beginning work as an independent geologist. Mark is responsible for quality control and data integrity. He received his Bachelor of Arts in geology and his master’s in geology and geophysics from Dartmouth College.

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