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These forces of change are dramatically reshaping the energy industry: Yergin

Daniel Yergin
Andrew Harrer | Bloomberg | Getty Images
Daniel Yergin

It's hard to think of a time when so many different forces are converging on the world energy industry from so many different directions. And they all, along with the changes they may usher in, will be part of the discussion when we convene at CERAWeek by IHS Markit this week in Houston.

Oil prices have stabilized in a $50 to $60 range since the OPEC/non-OPEC deal last November averted a dive toward $40 or below. It was an historic agreement because, for the first time, non-OPEC countries, galvanized by Russia, signed onto the cutbacks. And it is striking because of the 90 percent-plus compliance by OPEC countries, far higher than in past agreements. At CERAWeek the Saudi, Russian and United Arab Emirates oil ministers, along with the OPEC Secretary General, will be sharing their perspectives on what's ahead for the oil-exporting countries.

The agreement's success is also stimulating the rebound in shale oil production in the United States. When the global industry meets in Houston this time, prices will be 75 percent higher than they were at CERAWeek 2016, and that increase is translating into more spending and more rigs put back into operation. What's happening is well short of the irrational exuberance that preceded the 2014 price collapse.

But operators are much more efficient than they were then and can do a lot more with less. IHS Markit estimates that a dollar spent today will produce two and a half times more oil than it would have in 2014. That is a very big efficiency improvement. Of course, a major question is to what degree will costs of oil services, now beaten down into the ground, rise.

Overall, we expect U.S. oil production, driven by shale, will rise by more than half a million barrels per day this year, and it could be well more, depending on price.

For the major oil companies, a key question will continue to be managing costs as they cautiously begin to step up spending. It is striking to see the shift among many of the companies toward U.S. shale, with a continuing pause on developing the new multibillion-dollar mega-projects that were characteristic of the previous decade.

"The conjunction of so many competing forces, and the pace of change, creates major uncertainties and challenges for decision makers. It also makes the search for some answers — and clarity — all the more urgent."

One thing that will really dominate discussions is "Permania" — the intense focus on the Permian Basin. This reflects the realization that with the new shale technologies the Permian giant in west Texas and New Mexico could be one of the world's largest sources of oil in the future. Some 25 percent of M&A activity worldwide, according to IHS Herold, is concentrated in the Permian, and the numbers have been getting very big. The rationale, however, is that one can access multiple stacked geological formations of oil using the new technology.

Yet an entirely different question will also be on the agenda: What happens to climate change policy during the Trump administration? This question will be on the minds of many of our speakers here, which include the Executive Secretary of the United Nations Framework Convention on Climate Change. A year ago President Obama said climate was his top priority.

Clearly, it is far from the top priority of the Trump administration. And companies from around the world will be assessing how changes in policy affect their strategies and investment plans. This will be key not only for the renewable industry but also for natural gas suppliers. It's striking that the CEOs of several major European utilities will be talking at CERAWeek about the heavy investment they're making in wind in the United States.

Another difference between the previous and the present U.S. Administrations is on infrastructure, particularly pipelines. For the Trump Administration, infrastructure is a major priority. This has particular urgency for building the new pipelines to connect the new energy supplies with markets — as is so evident with the inexpensive Marcellus natural gas that is struggling to get to markets. At CERAWeek, there will be a good deal of discussion about rationalizing the permitting process for pipelines (and other projects) while ensuring environmental protection, getting time lines in place and providing some predictability for what has become an increasingly unpredictable and drawn-out process.

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The other big question for utilities is figuring out what the new balance will be for the traditional utility model, which is based upon central generation, versus a much more distributed business model, in which the relationship with the customer is very different. This has come to the fore not only because of government policies but because of the falling costs of wind and dramatically falling costs of solar.

The rapid pace of change

A major theme for the entire energy industry, and cutting across the entire program, is the future of mobility. This is one of our most important research projects, which we are calling Reinventing the Wheel. It seeks to integrate many different elements into a coherent view of the future.

Certainly, this question about the future of mobility touches every segment of the energy industry. For the oil industry it raises basic questions about what will happen to oil demand over the next two or three decades. Does the assumption of rising consumption until 2040 or beyond still hold as incomes go up around the world and population increases? Or will the penetration of electric vehicles and autonomous vehicles bring "peak demand" forward? For an electric-power industry that is seeing slow growth in consumption, will electric cars bring sizable new demand?

Of course, the questions about mobility point to a large force — the pace of change in technology. This is evident within the oil and gas industry, with the impact of the group of technologies that drove the shale revolution. But it also extends to the wider realm of technology. We will see at CERAWeek how the "ecosystem" of Silicon Valley interacts with the "ecosystem" of Houston. There will be much discussion about robotics and automation and the effect both have on energy systems, the future of work and the economy as a whole. There will even be a robot or two running around.

CERAWeek has for many years brought together what we call energy innovation pioneers. We have expanded the concept this year to establish the Agora, a phrase borrowed from the ancient Greeks, to comprise a marketplace of ideas about the technologies that will reshape industries and maybe even change the world.

The conjunction of so many competing forces, and the pace of change, creates major uncertainties and challenges for decision makers. It also makes the search for some answers — and clarity — all the more urgent.

— By Daniel Yergin, vice chairman of IHS Markit and chairman of CERAWeek by IHS Markit 2017, March 6–10, in Houston. His books include "The Prize" and "The Quest." He is a Pulitzer prize-winning oil analyst.