Used oil barrels are stacked at a storage facility in Seattle, Wash., on Feb. 12, 2015. Members of OPEC and major non-OPEC producers meet in Doha, Qatar, on Sunday to pursue an agreement on a production freeze.JASON REDMOND/Reuters
As they meet this weekend to wrestle with a global supply glut, major oil-producing countries face a long-term threat of "peak demand" for crude that will complicate any effort to agree on production discipline.
Members of OPEC and major non-OPEC producers meet in Doha, Qatar, on Sunday to pursue an agreement on a production freeze that is being promoted by Russia and some Gulf states as a way to help re-balance markets and bolster prices.
Prospects for a meaningful accord are low as Saudi Arabia is unlikely to yield in its battle for maintain its share of the global market, analysts said Friday. The Saudis say they won't agree to a production freeze that excludes Iran, and Tehran insists on the right to boost production now that international sanctions over its nuclear program have been removed.
"We think there will be no agreement [on Sunday] but they will try to manage the optics to try to make it look like the talks will continue and there is momentum behind this," Helima Croft, commodity analyst with RBC Capital Markets, said Friday. She suggested the Saudis are isolated within OPEC, as all other members are looking for a deal that would end the battle over market share.
But while the oil exporters grapple with a cyclical downturn, they also face a fundamental, long-term threat that provides an incentive for companies and countries to maximize current production, given the risk that reserves will be less valuable in the future.
A paper released this week warns that global oil demand may well peak in the coming decades – and even retreat – as world governments move more aggressively to address the challenges of climate change. The paper was published by the World Economic Forum – which serves as a think tank for global business leaders and political elite – and was co-authored by prominent American energy economist Amy Myers Jaffe and former Royal Dutch Shell PLC chief executive Jeroen van der Veer. It underscores the risks that fossil-fuel producers face, particularly those that invest in long-life assets such as deep-water projects, oil sands and pipelines.
"Producers are coming to realize that oil under the ground might soon be less valuable than oil produced and sold in the coming years," they wrote. "This dramatic shift in expectations is changing the operating environment for the future of oil and gas."
Ms. Myers Jaffe and Mr. van der Veer cited several different forecasts for crude demand. The International Energy Agency's base case – which is frequently cited by industry executives – sees consumption growing to 104-million barrels a day by 2040, from 91-million in 2014.
But the IEA also produced a forecast that is consistent with keeping global temperatures from rising more than 2 degrees C above pre-industrial levels. Under that scenario, the Paris-based agency suggests crude demand would peak in the mid-2020s and decline by 18 per cent below current levels to 74-million barrels a day by 2040. Statoil ASA has produced a similar "carbon constrained" forecast of declining demand.
In an interview, Ms. Myers Jaffe said the Saudis are well aware of the "peak demand" threat, and are acting accordingly by maintaining high levels of production and keeping prices low enough to discourage investment by competitors in North America and in the deep water around the world.
"If you're Saudi Arabia and you have 100 years' worth of reserves, and you know climate change is real and there are going to be tighter and tighter policies, and technology is shaving oil consumption, why would you hold up the price of oil so Exxon can get all their [crude] out of the ground and your oil will be the oil that is stranded?" she asked rhetorically. "They're going to optimize the amount of oil that doesn't get stranded for them."
The economist from University of California, Davis, said the mere threat of peak demand is changing the way investors and companies value reserves and allocate investment. "For 30 years, the oil industry has operated under the presumption that demand will always grow. Period," she said. "And now they can't operate under that assumption. It is so revolutionary."