The future of oil

March 21,2019

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What is the future of oil and how does it affect us? Everywhere else, market analysts call it a declining industry. But people in Pakistan generally think that it is not true. For us who have only started developing, such forecasts create a dilemma – how to adapt to a change that is coming but has not come yet. The market may go away when we may be only halfway through recouping our new investments in oil.

An article in ‘Financial Times’ (‘Oil must face its future as a declining industry’, June 13, 2018) in said: “After the coal industry, it is the sector most at risk…The time to stop investing is not today. But that time is coming. The industry needs to be clear that its future is one of long term decline .There is a possibility that the industry overinvests, as we reach that point of peak demand. Fighting for market share in a declining market would be even worse.”

By last year (2018), oil consumption was around 25 million tonnes per annum (mtpa); 6 mtpa of gasoline, 7 mtpa of diesel and 9 mtpa of furnace oil. Imports of furnace oil are banned now due to the emergence of LNG. The residual furnace oil consumption of 3 mtpa is continuing due to the product programme limitations of oil refineries resulting in continued expensive electricity production. Hopefully, in 3-5 years, this will go down to zero or near zero. If we assume doubling of gasoline demand in the next 7-10 yrs and 25 percent increase in demand of diesel, gasoline demand would be 14 mtpa ,Diesel 10 and others one, leading to 25 mtpa. What does that mean? It means no increase or small increase in oil demand in the next 10 years, a startling projection.

We are already suffering from unwanted production of 3 mtpa of furnace oil and don’t know what to do with it. It is quite possible that in 10 years, we have another shock. If gasoline and diesel demand goes down by half due to the possible influx of solar energy and electrical vehicles, oil demand may go down further and despite growth in the next 10 years may stagnate at 12-15 mtpa, almost the current level, a dire forecast for a sector which is used to a doubling period of 7 to 10 years.

This is a rough-cut back of the envelope analysis. Formal studies are required in this respect. However, it does indicate the nature of the problem and dilemmas faced by the energy planners and policymakers, if indeed they are aware of the prognosis and potentialities. The traditional energy paradigm is withering away. It is changing and it will force change. One should ride on the change rather than be ridden or even trampled upon.

An average energy infrastructure item like oil refineries, pipelines, transmission lines etc has a life of 30-50 yrs. The change has not finally materialised in full but will be there – so what to do? This would require significant optimisation work which must be initiated.

The reality on the ground is that energy planning in the country has remained fragmented for two main reasons – the oil sector never felt the need for serious work, and there were inter-agency rivalries. While individual sectoral or subsectoral planning may have different requirements and skill sets, there are issues of substitution and commonalities; one’s input is the other’s output. The power sector has been doing a better job; the crisis has not been due to a lack of forecast and planning but more due to the inaction of the political governments during 2000- 2013.

There have been several power demand and supply studies in the period between 2010 and now. Canadian consultants did a study for the NTDC which is being replicated or updated by the NTDC since then. There was a study by JICA recently and an aborted project of ADB-Planning Commission which attempted an integrated energy planning model, a much needed one. Why aborted? The Planning Commission itself may be largely responsible but no less are the machinations of the competing ministries. There was another attempt by the Planning Commission, by an agreement of cooperation with the world’s most credible energy sector body – the US EIA (Energy Information Agency).This linkage may have been a source of technology and know-how in energy planning. It is in limbo. Reportedly, there is a World Bank project working on it. So there is no dearth of advice and resources.

On the other side, one does not find any serious work and study in this in the oil and gas sector. Simplistic projections based on assumed growth rates have been made in the past. This may have worked in the past, but may not work anymore due to the evolving complicated situation that is developing in alternate energy, distributed and local focus and substitutions.

And then there is another vital aspect – the environment. Even if we forget the climate change issues being the burden of industrialised countries to bear, as argued by some, local environmental issues may force us to adopt less or non-polluting transport infrastructure. EVs are already on Pakistani roads in the form of imported hybrid cars. Hybrid doesn’t displace oil, but actual EVs will. With the cheapening of electrical storage technologies, and further cost efficiencies in solar, the competitive prowess of EVs will be tremendous. The government of Pakistan has already started giving concession to the import and local production of EVs.

Why are Saudis investing in oil as they have promised $10 billion in investment in the oil refining sector? Their assumption possibly is, and perhaps rightly so, that change in this part of the world comes later than in market economies. It is riskier today to invest in long-cycle oil refineries in the West but not so much in the East. Fortunately, oil refineries – unlike power plants or LNG – are not installed under take or pay contracts; the risk in refineries are borne by themselves, unless some FDI clauses build in some contrary stipulations.

On the other hand, there is quite some controversy as to the decline of oil. Global oil demand is 100 million barrels per day and still growing at 1.5 percent. Earlier predictions of peak demand (after which decline starts) have been proven wrong. Environmentalists are predicting peak demand for 2023-2025, as they have motivations in this respect. However, lack of or slow action on the carbon front as well as Trump’s policies are proving such prognoses as wishful. Oil companies agree on peak demand occurring after 20 years. And after peak, there might be a plateau and not a bell curve. And if oil demand switches away from the transport sector, there would still be 40 percent of demand coming out of petrochemicals, fertilisers, chemicals and the cosmetic industry The dilemma is stronger for poor countries that are short of capital and have other priorities waiting as well. The need for careful studies and forethought has never been more.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s EnergyIssues: Success and Challenges’.



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