Technology in the oil industry has turned the sector “upside down,” creating an abundance of supply with long-term consequences for pricing, ARC Energy Research Institute’s Peter Tertzakian told a CFA audience in Calgary.
“If you plot the rise of just shale gas in the U.S., the impact of this new modality of extraction is by far the biggest event that’s going on right now,” the author, podcaster and ARC executive director said on a panel at CFA Society Calgary’s annual oil and gas forecast breakfast on Thursday.
Despite ongoing threats from trade wars and a slowing global economy, Tertzakian said the biggest disruption the oil and gas industry now faces is occurring within the industry itself, and has yet to be fully grasped.
“Things have been turned upside down by technology in the field,” he said. “We’ve gone from scarcity to abundance in a very short period of time.”
Canada’s oilpatch is in a difficult situation, but the industry has adapted and has the lowest oil and gas prices in the world, he said.
“I would argue we are much better positioned to ride out the next downturn than any other jurisdiction,” he said.
“My advice is to make sure your business works when oil is between $50 a barrel — maximum $55 a barrel — because that’s the long-term price. Anything above that is gravy.”
The biggest threat to oil prices is how a slowing global economy would impact demand, Tertzakian said.
“We haven’t had a recession in 10 or 11 years, and if and when that comes you can potentially expect to see sub-one million barrels of oil a day,” he said.
Another major issue for Canada’s battered oil and gas industry is environmental, social and governance (ESG) criteria, which have permeated very rapidly into the public markets, Tertzakian said.
“We are at a critical juncture in Canada and in Alberta, because we are losing control of defining those ESG metrics. They’re still fluid and we need to be at the front of this, because if you don’t set the standards, somebody else is going to,” he said.
“We know we are world leaders in ESG, but we are unable to measure it effectively in a standardized manner and communicate it. We need to take back this agenda and set the standards, and at a minimum we need to be a part of the conversation.”
Michael Tran, RBC Capital Markets managing director, global energy strategy, said companies that do well according to ESG criteria are generally much better-run companies.
“If you become a cash-generating machine, you get to a point where you can’t be ignored — capital has to come back,” he said on the panel.
Tran sees China, India and the rest of emerging Asia as the three pillars of demand growth for the oil and gas industry in the next year and beyond, though he added that Chinese gasoline demand growth has started to slow.
“What concerns me is not just natural economics at play, but the Chinese government pushing away from fossil fuels toward electric vehicles,” he said.
“China is one of the last few pillars of global oil demand and, through sheer will, Chinese government policy is starting to shape how we think about global oil growth demand going forward.”
Transforming the industry with tech
One of the bright spots for the oil and gas industry is technology, which offers the potential to drive down production costs.
“Energy companies need to make investments to start capturing that value,” IBM Canada associate partner Adnan Haider said on the panel.
According to the World Economic Forum, Haider noted, there is approximately $1 trillion in value that oil firms can capture over the next 10 years through what he called “Industry 4.0” — a combination of data analytics, the internet of things and digital transformation.
“Market leaders are investing in this space and they are starting to see the returns,” Haider said. “They are actively improving operational excellence — driving efficiency, lowering costs of production, lowering administrative overhead — and they are increasing production.”
On the production side, there is a significant role that data and analytics can play in achieving the environmental stewardship metrics that companies are looking for, he added. For example, artificial intelligence can enable plant operators and site supervisors to make real-time decisions to optimize energy consumption and oilsands tailings losses, and reduce flaring and greenhouse gas emissions.
For those in an investment management role, advanced analytics can help ingest unstructured data, filter it, and distil and analyze it at scale, Haider said.