The age of disruption is here. Disruption is all around us, it affects the energy industry. Our inner hunger, the urge to find our bearings, to identify new business opportunities, leads us to new shores.
Tomorrow’s energy industry will be more interconnected with other industries, steel, mining, telecommunication and housing. The energy world will be more volatile, more dynamic, more risky, and everything will happen much faster.
The energy world is being radically transformed by new technologies and innovative designs that will reshape the industry completely. We are leaving the first quarter of the 21st century behind. These new trends that are beginning to reshape our sector will peak in the 2020 – 2030. This is the period we are now entering.
We may not see the full impact of these trends until 2040. By then, renewables will play a much larger role in the international energy business. But even then, oil will continue to play a role in the economic architecture, and this fact should not be underestimated. In fact, oil and gas will provide sufficient leverage to take renewable energy generation to unprecedented levels. We will see these trends in most regions of the world, although to a lesser extent in countries that are relatively energy independent. This is a unique group of countries that includes energy powers such as Saudi Arabia, the Gulf States in general, and the Russian Federation.
There are a variety of factors that will have an impact on the energy industry in the coming years. We take a closer look at what these factors are and how they will affect the energy industry as a whole.
1. Geopolitical uncertainty in energy markets will reshape the structure of the energy industry in the next 10 years
Geopolitical uncertainty will be the order of the day over the next 10 years as we gradually enter a period of turbulence in transnational relations. This will not leave the energy industry unscathed, as it will be a central player in the geopolitical theater of nations. Every 100 years or so, geopolitical shifts take place in Western politics, largely coinciding with periods of enormous technological progress in society at large. In Germany, we saw early industrialization in the Ruhr region in the 19th century, and full industrialization was achieved in the same region in the early 20th century. At the same time, energy demand increased significantly to supply the increased industrial production. In many cases, this energy demand could not be effectively met due to geopolitical disruptions. For the oil industry, such market disruptions mean that logistics, operations, and investment in new facilities are affected, and the cost of energy production increases.
Uncertainty is not good for the energy industry, because companies have to keep liquidity on hand in case market turbulence affects their operations. This means that investments may not be made, which reduces oil production in the long term. Geopolitical uncertainty can lead to higher oil prices in the short, medium and long term, depending on the severity and duration of the market disruption.
2. How we visualize data, control motion and analyze energy supply chains in real time with 5G
New processing techniques, such as geomapping, will make a major contribution to the success of the oil industry in the future in order to tap into previously unrecoverable oil reserves. It allows us to map entire areas and locate residual reserves underground. 5G and narrow AI are completely new and will improve the recovery rate of oil fields where we have had technological limitations. This could also be of great importance in the Gulf States to further explore geological strata underground. There is still great potential there and with geomapping we can significantly reduce CAPEX.
But that is not all. The entire energy supply chain can be visualized and analyzed. This will lead to more efficient use of energy to transport energy from one place to another, further reducing costs. This in turn will help customers and improve the profitability of energy companies. One of the biggest benefits 5G will bring to the energy industry is that we will reduce CAPEX and OPEX. CAPEX will be reduced in the oil exploration and upstream business. OPEX will be significantly reduced in the midstream and downstream business.
There is the added benefit that we will be able to look at data in real time. This will help us to reduce downtime and connect different areas of the energy industry.
3. Gas storage in salt caverns and alternative energy storage facilities
This is an attractive option for many oil-importing countries to gain some leverage over oil-exporting countries. Gas storage makes a lot of sense in the southeastern U.S. and U.S. Midwest, as well as northern Germany, which have the right geology to store natural gas underground. In the case of the U.S., natural gas is available in sufficient quantities thanks to the shale revolution. The shale revolution has led to an abundance of natural gas that is exported abroad. Domestic infrastructure is not yet developed to the point where natural gas can be fully utilized by all players in industry and commerce. Therefore, it makes economic sense to store natural gas in caverns until later use.
In Germany, the situation is quite different from that in the United States. Germany is heavily dependent on Russian hydrocarbon exports. It should be added that the energy that Germany can store underground is delivered as pipeline gas or LNG. In the case of LNG, most of the gas comes from either the Gulf States or the United States. This is not an ideal situation for Germany, as it significantly increases energy costs. Nevertheless, Germany acts as a distributor of gas to neighboring countries. This serves as a buffer for renewable energy. Europe’s solution could be the storage of natural gas in salt caverns.
There are other ways to store energy. We have to distinguish between electricity and hydrocarbons. Storing electricity involves a loss in terms of energy potential, because we convert electricity into another energy source in order to store it. Later, we may have to convert it back to electricity, which involves further losses. Renewables produce electricity, and in many cases that makes renewables an inferior energy source when it comes to storing energy for longer periods of time. While some energy potential is lost when hydrocarbons are stored, the losses are not nearly as dramatic as for electricity. Hydrocarbons themselves are stored solar energy. Storing electricity in batteries also involves energy losses.
4. We achieve grid parity with renewable energy sources for solar and wind energy
Grid parity between renewables and fossil fuels will be achieved. As wind turbines have grown larger and industrial processes have become more refined, the cost per kWh has dropped significantly. This was just the beginning of an even steeper drop, where some types of renewable energy will fall below the price per kWh of fossil fuels. The drive to replace fossil fuels with renewable energy will be strongest where there are no domestic hydrocarbon energy resources.
5. Reviving peak oil theory: will petroleum prices be demand or supply driven?
Peak oil is on the minds of many in the oil industry, and for good reason. Peak oil is important to our understanding of the future of the energy industry. That’s because hydrocarbon fuels, especially oil, follow a natural gradient in which oil production initially increases and later decreases once the cheap, easy-to-produce oil has been taken out of the ground. What remains is the expensive, not easily recoverable oil. At peak production, the midpoint, we have used half of all the oil. The further we go into the future, the harder it becomes to extract the oil. The concept itself was first developed by Marion King Hubbert, who studied in detail the production of oil wells in the United States and around the world.
There are a variety of forecasts that estimate when different parts of the world and the world as a whole will have reached peak oil. Although there is no clear consensus on when we will have reached that point, it is very likely that we have already reached peak oil. That is the point at which we have consumed half of all oil, for conventional oil production. Unconventionally recoverable oil is likely to peak at some point in the future. This further extends the time horizon we have for switching to alternative energy sources. Renewables are widely seen as the future of the energy industry.
6. Demography: The aging industrialized world and energy demand
Demography doesn’t necessarily pop into people’s heads right away. Nevertheless, demographic trends underpin every aspect of the energy industry. We shouldn’t forget that industrialization itself had a major impact on demographics in Western and Eastern countries. But demographics ultimately lead to an increasing push to further digitize and robotize existing operations in the energy sector.
7. The increasing interdependence of the circular economy and the oil industry
This point is actually related to the peak oil theory. As the availability of resources declines, we are looking for alternatives as to where we get our energy reserves in the future. But hydrocarbon fuels are not the only commodities facing abrupt decline in the near future. A variety of metals are also affected and are seeing diminishing returns. This is especially true in the mining sector, where the quality of ore metals is declining. Mining projects for copper, which are often open pit mining operations, are getting bigger and bigger. Costs are skyrocketing. The higher the cost, the more attractive it is to recycle existing metals. We also need to think about other waste streams that we can turn into fuel to meet our energy needs. Waste-to-hydrogen is gaining traction. Capital is being invested in this area, and hydrogen can make a significant contribution to the green economy, even if it is unlikely to replace fossil fuels in the foreseeable future.
At this point, we haven’t even talked about electric car batteries. For electric car batteries, we have very limited options on how to recycle them. If we want to build them, we have to find a way to recover the metals in an environmentally friendly way. There is much debate about the environmental compatibility of electric car batteries compared to conventional diesel engines. The issue is whether electric car batteries are really the more environmentally friendly solution.
To illustrate this, let’s take just one example. Battery manufacturers as well as carmakers build new factories in East Germany. East Germany is a region that clearly benefits from such investments. What we’re saying is that regions that didn’t have a chance in the Old Economy are getting a new chance to thrive in the New Economy. The New Economy certainly leads to creative destruction and allows new companies to enter the energy sector, which drives innovation. This is creating an entirely new energy economy, new industrial networks and innovative products that improve people’s lives.
8. The interface between the water cycle and the oil business
It is often said that water is the oil of the 21st century. There is some truth to this statement. Some countries have no indigenous fossil fuel reserves, others have no indigenous water reserves. The Gulf States may suggest that the countries that do not have sufficient domestic water reserves are often the ones that have oil reserves in abundance and vice versa. The first question is how to improve desalination plants that turn salt water into fresh water that can be used for agricultural production. Related to this is the question of how to desalinate salt water to the point where almost no salt remains, because over time, salt deposits accumulate in fields that can harm crops.
Unfortunately, the process of turning salt water into fresh water is very energy intensive. It requires enormous amounts of energy and desalination plants are prohibitively expensive to build. As fields continue to erode, soil quality deteriorates, and nutrients are poorly absorbed by crops. We now face an agricultural crisis. This agricultural crisis is exacerbated by the fact that water resources are diminishing just as rapidly as soil quality deteriorates, especially in countries near the equator.
We see that the water cycle – energy nexus plays a central role in planning energy systems for the 21st century. It is perhaps as important as the circular economy – energy nexus, if not more so. One of the key questions of this century is how we can provide sufficient freshwater to countries with low water availability. How can we make that freshwater available in rural areas and at low costs normally associated with irrigation techniques. Irrigation itself is a fairly energy-intensive process, which further exacerbates the problem. Since the increased use of fossil fuels for desalination leads to increased CO2 emissions into the atmosphere, we need to ask whether renewable energy sources such as advanced solar panels can do the job instead.
Fresh water production is just one area we need to keep an eye on. Another aspect is the treatment of the wastewater and whether we can use the wastewater to turn it into freshwater. Then the question is what we can do with the rest, the organic components. One idea is that we convert sewage sludge into fuel to reduce our consumption of fossil fuels. Major investments have been made in this area. Sewage sludge-to-fuel investments may be applicable in and around large urban centers to prevent algal blooms along shorelines.