Anyone who wants to understand how big oil views the energy market should take a close look at the $50bn bid by Chevron for the US company Anadarko, announced on Friday.
The deal is based on three important assumptions.
The first is that oil is here to stay. Peak oil — meaning peak demand — is still a long way off and is unlikely to be reached before 2030. Electric vehicles get all the attention but the number of cars and other light vehicles with internal combustion engines is still between 97 and 98 per cent of the global market. Even when oil demand peaks there should be no presumption that it will be followed by a sudden fall. A plateau is much more likely. Electric vehicles will win a share of the market but the growth areas of freight transport and aviation are still secure, almost completely unchallenged markets for oil. So is the petrochemicals business. A plateau of 100m barrels a day is the most likely outcome and that means that there is still a strong need for oil resources to be found and developed.
Second, the industry is starting to realise that it has put too much emphasis on gas in recent years and not enough on oil. Natural gas demand has been strong and that has encouraged heavy investment in new gas developments. Chevron itself has invested heavily in gas in recent years — notably in a series of expensive large-scale projects in Australia. The nagging worry is that natural gas supply will outweigh demand as low-cost renewables, backed by public policies designed to reduce emissions, begin to penetrate electricity markets across the world. The demand for gas for use in power generation has driven recent growth but as the electricity market becomes more competitive gas will be increasingly vulnerable to the onward march of renewables. In the medium term, oil begins to appear a better bet.
But the challenge, and the third and crucial message from the Chevron bid is that of access to the resources needed to sustain a large oil business. The challenge is compounded by the need to find supplies which can be developed at a low cost which will be resilient to any further fall in prices. There is no physical shortage of oil across the world but there are high political barriers to investment. The oil reserves of the Middle East remain largely closed to international investment because of state ownership (Saudi Arabia), or sanctions (Iran) or physical risks (Libya). Russia is off limits because of US sanctions legislation, Nigeria is still mired in corruption and Venezuela is trapped in its own political conflict.
Much easier then to focus on the resources available at home. If you have to pay a premium so be it. The cost reductions which can be made when taking over a company such as Anadarko will be considerable. The assets in the Permian Basin of Texas and New Mexico, one of the largest oilfields ever found outside the Middle East, are a great prize, not least because of the low costs of development and the existence of new and extensive infrastructure which can take the resources to market.
The bid announced last week will not be the last. Chevron’s thinking is mirrored across the industry. Big oil came late to the US shale revolution and was too credulous of the negative commentators who believed that shale was a nine-day wonder. The continued success of the shale industry has changed all that and Chevron’s vote of confidence will encourage others to look for opportunities close to home.
The writer is an energy commentator for the FT and chair of the King’s Policy Institute at King’s College London
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