Article by Lord Browne, Executive Chairman L1 Energy
What can be said about the present period of low oil prices? We think it is characterised by four trends.
The first trend is towards fossil fuel abundance. In 1956, the American geologist Marion King Hubbert coined the term ‘peak oil’. He predicted that production would peak around the year 2000 and then decline rapidly. But the steady march forward of technology has enabled humankind to unlock new reserves of energy, which have continued to fuel human progress. The successful development of shale and tight rock is the latest and most spectacular chapter in this story. It has enabled the United States to double its production since 2010, putting the US on track to be the world’s largest oil producer.
The second trend is the movement away from carbon-intensive fuels towards a range of cheap new reserves of energy and a broader range of choices. Solar energy is a good example. In 1977, solar capacity cost $76 per Watt. But since then, the cost has dropped below a dollar per Watt. This has contributed to a 6-fold increase in renewable energy generation capacity, and the creation of an industry which attracts annual investment of almost 300 billion dollars. We now have a much wider range of energy options at our disposal than at any time in human history.
The third trend is a result of the first two. Lower prices and a growing number of viable energy options mean that economies based on hydrocarbons face a new challenge. Oil riches made it possible for them to support growing populations and a new middle class. But lower prices, and a sense that demand may weaken, have left these governments worrying how to support populations which were raised on public subsidies. The potential withdrawal of these subsidies has created a new source of political instability, the outcome of which remains to be seen.
The fourth trend is the decline in trust across the world between business, governments, and the rest of society. A recent survey found that the majority does not trust business, and two thirds do not trust government. This should be particularly concerning for the energy industry, which is built around long-term partnerships, contracts and codes of behaviour.
These four trends explain why we find ourselves in a period of churn and uncertainty today, a period in which the choices are many, demand is less certain, and prices are lower. In this environment, consolidation is the natural response. This is why L1 is seeking to merge DEA with Wintershall, to create a new German national champion that has greater scale, greater relevance, and more opportunities for growth.