Panel
The Changing Energy Landscape: What's the New Normal?
- Global oil production is declining at 4% to 5% annually, requiring the discovery of 4 million barrels per year to maintain levels, while demand growth is projected at 1.2 million barrels per day this year against a 5 million barrel supply need.
- U.S. crude output is expected to fall by over 1 million barrels from its peak by year-end, and the industry must replace more than 10 million barrels annually over the next five years, with U.S. production needing to increase by 12 to 15 million barrels to offset natural decline.
- Global oil and gas supply and demand are forecast to balance by year-end, potentially triggering price increases in 2017 as the marginal cost of the most expensive barrel determines market price.
- The speaker estimates current production costs at approximately $20 per barrel, significantly higher than the $45 historical average, and disputes profitability claims for companies operating at $15 per barrel due to high sunk costs.
- Moderate price rises are expected to cause equity losses to crystallize in roughly 30 to 40 companies, while creditors are anticipated to take control of firms with Drilled But Uncompleted (DUC) wells to determine future funding.
- Approximately 60 oil and gas bankruptcies have occurred since the previous year, and dozens more restructurings are expected even if prices remain at $45, prompting Apollo Global Management to target acquisitions of five distressed companies.
- Capital investment is projected to decline due to regulatory uncertainty and high access costs, exemplified by the Shell Chukchi Sea withdrawal, with no new large-scale LNG export facilities planned in the U.S. or Canada in the near future due to contract insecurity.
- Small-scale LNG projects are expected to dominate activity for the next five to seven years, with a global glut anticipated until early 2020 or 2021 despite simultaneous capacity additions in Australia and the U.S.
- Freeport LNG is estimated to cost $13.5 billion total, with $12.5 billion allocated to export conversion, and a fourth train construction is planned to come online in 2022.
- Natural gas prices are forecast to rise to $3 per MMBtu due to new demand from Mexico's pipeline capacity and retiring coal plants, though a price cap is expected to eventually trigger drilling that lowers prices back to $2.
- The U.S. possesses 900 trillion cubic feet of natural gas available for profitable drilling at $3 or less, which is sufficient for 30 years of supply.
- Renewable energy is projected to comprise 30% to 40% of the global energy mix within 50 years, with emerging markets like South Africa, Chile, and India offering investment opportunities due to high power prices.
- U.S. renewable investment faces difficulties under the current regulatory environment, specifically a lack of natural gas prices above $3.50, whereas a fracking ban would serve as a buy signal for renewables.
- Oil prices are predicted to eventually return to the $75 to $80 range within one to four years, with a potential scenario where prices spike to $120 before falling if the futures curve aligns with long-term market needs.
- A discrepancy exists between the December 2021 futures market price of $53 and public market pricing, creating a divergence for investors regarding high versus low price scenarios.
- The "new normal" for the energy sector involves continued volatility and cyclical downturns rather than permanent structural price changes, with a transition away from petroleum in transportation leading to increased natural gas dependency.
- Future energy security is expected to shift toward "critical minerals" as a strategic vulnerability, while electric vehicle battery manufacturing will maintain demand for hydrocarbons to produce lithium and nickel.
- Grid reliability will require capacity payments to finance hydrocarbon power plants, ensuring a "smorgasbord" of energy sources including wind, solar, biomass, and hydro alongside oil and gas.
- The Permian Basin and northern Midland Basin are expected to remain the most cost-effective regions for future oil exploration, while the Energy Policy Modernization Act aims to be moved out of the Senate within 10 days.
- Despite a long-term projection of 10 to 12 billion people driving power demand, investing in public energy equity or debt is considered unwise unless investors are certain of an 80% price increase.