New Geopolitics Means Arctic Oil, Mega-projects’ BAU Could be Uphill

Western oil leaders may be worrying that Russian President Vladimir Putin’s actions in the Crimea will lead to a ban on international investment in the Russian Arctic, but if it does, that would be doing US companies a favor. The prospects that such mega-investments will remain profitable over 20 years looks questionable at best, even without the geopolitical risk.  

The new BP Statistical World Energy Outlook (2013) is projected that “new energy” is expected to contribute more than half of the growth in future energy supplies in the coming two decades.  BP defines “new energy” as shale, oil sands, renewables, and bioenergy. BP’s projections for new energy are probably conservative because they don’t take into account how governments are going to react to the new nexus of geopolitical shocks now coming into the oil world.

As I write in a new article on the Mitchell Foundation blog, the need to think about an energy system that is less dependent on oil for mobility and industrialization is pressing. Political instability across the globe from Russia and Ukraine to Venezuela to Iraq has laid bare the false promise of relying on a global oil and gas supply business as usual. Europe is facing the unpleasant choice of choosing between an unacceptable Russian incursion into Ukraine and its own energy security. The United States is facing the hard cold truth that a political devolution in Caracas would open the difficult question of who, should chaos prevail, owns and operates the Venezuela-owned Citgo refining and marketing system that represents 5 percent of the US market.  And the critical challenge of climate change and related severe weather events dictates that governments renew efforts at both mitigation (less carbon intensive energy) and resilience (less large-scale, centralized energy).

As discussed at this year’s World Economic Forum, the oil industry has faced more Black Swans since 2012 than perhaps any other time in its history not only from these geopolitical and severe weather events, but also from disruptive technologies. And, the tech boom is going to continue to change the energy industry, for the better (productivity, safety, and sustainability) and for the worse (cyber-attack). The change is likely to be faster and more transformational than most senior oil industry executives care to admit.

 BP in its 2013 World Energy Outlook acknowledged the high likelihood that oil demand in the industrial economies has peaked. BP’s 2013 outlook also opened the door to the idea that exponential growth in oil demand in China might similarly fail to materialize as the country evolved towards less oil intensive economic activities. The BP forecast cited tremendous gains in energy efficiency, changing patterns in the transportation sector and a rise in new energy such as shale gas and renewables as curbing the world’s future thirst for oil.   

The idea that the world needs to –and might actually start to– abandon the age of oil is one that falls on deaf ears inside the oil industry itself which is committed to a business as usual model tied to legacy assets and mega-projects like the Arctic. But it is clear now that the world’s largest oil companies were caught off guard when smaller, more nimble competitors such as Pioneer Natural Resources, Continental Resources, Range Resources, Southwestern Energy, Noble Energy, and Devon, to name a few, cracked the code on US shale oil and gas resources. The industry is also betting on the impossibility of scale-up to new transportation technologies that would challenge oil’s dominance on that sector. However, new consumer technologies are starting to nip at the heels of the colossus that currently maintains oil’s dominance in the energy system. So far, that change is slow. But geopolitical events might drive change to move faster than expected by virtue of necessity as the ability of the oil industry to maintain investment in mega-projects falters due to growing political instability across the globe.