Big Oil Loses a Safe Space in Houston

(Bloomberg Opinion) -- CERAWeek has long been something of a safe space for the oil industry, where delegates trade gossip, do a little business and speculate over drinks and ballroom chicken where their beloved, if mercurial, market might be headed.

This year’s get-together, the 38th and organized as usual by IHS Markit, was called “New world of rivalries: Reshaping the energy future.” CERAWeek’s headline themes have shifted over the years, with energy security and growth prominent in boom times and risk coming to the fore after the 2008 crash. Since the start of the dislocation in 2014, however, the consistent element is change. 

The encroachments of the wider world were evident this week. While the sponsor list featured familiar faces such as BP Plc and Exxon Mobil Corp., it was topped by names such as Amazon Web Services and Microsoft Azure. CERAWeek’s Agora technology sub-conference continued its expansion, now filling a distinct space of its own, replete with white-leather chairs, purple accent lights and a robot dispensing espresso. Meanwhile, Secretary of State Mike Pompeo put in a feisty appearance. Later that same evening, BP’s CEO Bob Dudley told the dinner crowd “we are operating in a world that is not on a sustainable path.”

Emerging out of all this – at least 44 public sessions on Monday alone, by my count – is a sense that the physics of energy are changing. Three constants in the market can no longer be taken for granted, regardless of any cyclical swing.

The first constant is that cycle itself. It isn’t dead; rather, it’s hyperactive. U.S. shale has become the dominant force in global oil-supply growth. Shale, a scaleable business where access to capital is the defining variable and development is measured in months rather than years, reacts more quickly to prices. That shortens the cycle dramatically – as was amply demonstrated last year by exploration and production companies busting through spending budgets on the back of a short rally, thereby ensuring it remained short. The relative lack of long discussions about the oil price at CERAWeek was striking (prevailing attitude: Let’s just talk about how we live in a $60-ish world, barring some shock).

That said, the other two constants turning squishy represent shocks of their own. Fatih Birol, Executive Director of the International Energy Agency, began his press conference Monday morning on a topic about which, he said, “it is rare you hear from us”: geopolitics. He duly mentioned the likes of Venezuela and Iran, but his main topic was a projection that could have been headlined “America First.” The IEA expects the U.S. to account for 70 percent of the increase in non-OPEC oil supply through 2024:

The following evening, “America First” segued into something akin to “Team America” with Pompeo’s speech:

We’re not just exporting American energy, we’re exporting our commercial value system to our friends and to our partners … Our model matters now, frankly, more than ever in an era of great power rivalry and competition where some nations are using their energy for malign ends, and not to promote prosperity in the way we do here in the West. They don’t have the values of freedom and liberty, of the rule of law that we do, and they’re using their energy to destroy ours.

Regardless of your personal feelings about freedom-fracks, we are watching the U.S. ditch its (mostly) market-oriented strategy for energy security in favor of pledging to use oil and gas as tools of raw geopolitical power. This is a fundamental change.

It’s one not lost on a country singled out by Pompeo: China. Which brings us to the third constant: demand.

CERA founder Daniel Yergin interviewed Hou Qijun, vice president at China National Petroleum Corporation, on stage. Asked about China’s oil demand, Hou began by noting the country depends on imports for roughly two thirds of it. He went on to say 2018 was a “turning point” for electric vehicles in China and suggested annual oil demand there might peak at around 700 million tonnes, or roughly 14 million barrels a day (the IEA projects it will use 13.5 million barrels a day this year).

Whether or not Hou’s forecast is realistic, the point is he framed Chinese oil demand first and foremost in strategic terms. Beijing’s evident concern about relying on the Middle East, and the U.S. Navy, for its energy supply should weigh very heavily in discussions about the shape and timing of peak oil demand.

So should, of course, climate change. That subject was inescapable at CERAWeek, either directly in speeches like Dudley’s or indirectly in, say, rampant enthusiasm for natural gas (with methane emissions checked, of course). There was even an F-150 truck with a prototype higher-efficiency internal combustion engine, sporting the Aramco logo of Saudi Arabian Oil Co., aimed at countering the threat of electrification.

Parameters dictate pathways, and while many of the delegates at CERAWeek are used to riding energy’s cycles, changing physics requires true evolution. Advantage lies chiefly in flexibility, with the oil and gas pricing, trade, and demand outlook more uncertain than they’ve been in a generation, possibly ever. Hence, we’ve seen majors such as Exxon and Chevron Corp. go all-in on short-cycle shale and smaller exploration and production companies struggling to remain relevant to investors.

Their arch-challenge is climate change, impacting not just their balance sheets but also their license to operate. Maarten Wetselaar, integrated gas and new energies director at Royal Dutch Shell Plc, summed up the complexity of this, commenting that even if oil companies position themselves to be profitable as demand slows and peaks, “there’s a risk that you’ll be seen eventually as a profitable part of the problem.”

But the incumbents most at risk in this environment are OPEC countries, which were less prominent than at last year’s gathering. With ironic, and tragic, timing, as the latest CERAWeek was kicking off, large parts of founding OPEC member Venezuela were in darkness.

The IEA’s supply projection implies OPEC will cede market share for the foreseeable future. It’s a mainstream view found both in BP’s recently-published Energy Outlook and, remarkably, OPEC’s own forecasts released last September. Not for nothing did secretary General Mohammad Barkindo, who was at CERAWeek, observe that the group’s efforts to rebalance the oil market via supply cuts, penciled in originally for six months, remain “a work in progress” in their third year.

Perhaps more than anyone else in this market, OPEC is a creature of a world in which oil cycles are long, the U.S. guarantees security of trade (and of the organization’s core members in the Arabian peninsula), and demand only goes up. Most members have built their economies around that arrangement of forces. And those countries now constitute the biggest risk of dislocation in global energy as those forces are transformed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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