Oil companies read the tea leaves (and lots of data)

Predicting energy demand, population growth, policy changes and other global trends that will affect oil prices and industry strategy decades from now is far from an exact science. But major oil and gas companies see value in trying.

BP, Royal Dutch Shell and Exxon Mobil Corp. are among the companies that publish outlooks forecasting the future of the energy sector. BP’s updated 2030 outlook is set for release Wednesday.

The goal: To figure out what the energy world will look like in the future so they can make the most profitable exploration and production decisions today. By releasing their conclusions publicly, these companies also spark an annual conversation about the world’s energy needs.

“You have to know what the future framework is before you can make commitments that are in the billions to tens of billions of dollars,” said John Felmy, the American Petroleum Institute’s chief economist.

The challenge is how to forecast events 20 to 40 years from now in a field that changes regularly and is so unpredictable.

At London-based BP, a 10-member team works year-round on the company’s energy projections, which include assumptions on changes in policy, technology and the economy. The team consults internal and external experts, reviews public and private data and projects how regulations may evolve.

“Things are always changing, and you need to be humble about your ability to predict the future,” BP economist Mark Finley said.

Finley and other members of the team — which spans offices in London, Washington, Moscow, Beijing and Mumbai, India — are putting the finishing touches on this year’s update. It will be the third year in which the company has released the projections publicly.

The forecast addresses a number of questions and issues, including where energy growth will come from in 2030, what the implications will be for oil and natural gas markets in the U.S., and what the overall supply and demand picture will look like.

While these and other factors invariably affect oil prices, one thing BP’s forecast doesn’t include is price predictions.

“We don’t forecast prices for our own management either because they’re so volatile,” Finley said.

Instead, he said, BP hopes to identify key trends that provide insight into the likely direction of energy in the world and opportunities the trends present.

BP executives then take those conclusions and determine where to invest.

“It becomes part of the context in which decisions are made,” Finley said. “Part of the value of it is having a single consistent view inside the company.”

BP isn’t alone in the effort.

For 40 years, Shell has been developing various global scenarios to help guide strategy by predicting the energy landscape decades ahead.

In its latest projections, for 2050, Shell developed two scenarios, one in which policymakers pay little attention to more efficient energy use until supplies are tight and the other in which economic, energy security and environmental concerns prompt growing political attention to energy use issues.

Irving-based Exxon Mobil each year updates its outlook for trends that will shape global energy supply and demand over the coming decades. The reports look at how much energy will be needed in the future and what types of fuels will meet demand.

In its latest update of its view of the energy world in 2040, it predicted, among other things, that global energy demand will grow 35 percent compared to 2010, as the world’s population expands from about 7 billion to nearly 9 billion, led by growth in Africa and India.

Not all the oil and gas majors produce such reports or, if they do, release them publicly.

San Ramon, Calif.-based Chevron does not produce any such external document or report, spokesman Russell Johnson said. Internal strategists do evaluate a variety of data and forecasts to determine pricing assumptions that the company uses to develop its plans, he said.

Houston-based Marathon Oil Corp. also does not issue a public forecast. Spokesman John Porretto declined to discuss any internal forecasting methods that company officials may use.

Felmy, the American Petroleum Institute economist, said companies that aren’t releasing reports may do the same analyses internally but are wary of making them public.

“Anytime you put more material out, you reveal to your competitors what your views of the world are, and that can have negative consequences,” he said.

For the companies that do issue the reports, the benefit is informing investors and the global community, Felmy said.

“Some of these things are pretty easy to understand,” he said. “You might not know the magnitude, but you certainly know the direction.”

And what happens if their projections are off the mark?

“That’s why you do it every year, so you continue to adjust your outlook to changing conditions,” Felmy said.