Oil and Gas Production: Environmental impact of oil

Oil and Gas Production: Environmental impact of oil.

 

Digest

Saturday, November 15, 2014

Oil and Gas Production: Environmental impact of oil

A bird soaked in oil after an oil spill

 

I am always asked about the future of the petroleum and petrochemical industries. 

 They are complex and impact many facets of our lives from plastics, soap and pharmaceuticals. But for ever positive aspect petrochemicals bring they are often overshadowed, by the impact drilling has on communities and the resulting pollution to the environment, so how will the industry change in the next few years?

The last century showed that petroleum production has constantly increased to meet demand mainly from Western societies. In the mid 2000s, the price of crude oil had shot up like a rocket and was holding steady until a few months ago. So how will the industry continue to meet the increasing demands, placate the environmentalists and maintain supply for critical markets? More importantly what does this mean for the global economy?

With nearly 60% of global energy demands coming from oil and gas production and more than a tenth of the stock market invested in petroleum trades, whatever happens to one aspect of the market has a dramatic domino affect on surrounding consumer sectors. Petroleum organisations have to devise solutions to current problems and strategically plan for the future. Traditionally they have played a solo performance but now the rest of the orchestra must be involved, which has to include both governments and lobby groups to analyse the impacts of decision makers and strategists.

There are a number of issues that must be properly looked into with due diligence. Firstly the petroleum industry has historically held a monopolistic control over the transportation. As a society we rely heavily on cars, busses and trucks for our transportation needs. With the environmental groups applying great pressure on Western governments, they have had to implement carbon tariffs on air travel, petrol and diesel, the haulage industry and gas fired power stations. After 2010 many countries have had to impose emissions controls to reduce their carbon footprint, meaning electric cars have become more popular, biodiesel and LPG are now viable alternatives for cars and trucks and as a result certain sectors have had to reduce their usage of petrol and diesel. If this was something over a localised area then the costs could be absorbed by the petroleum industry, however as it is becoming a pandemic across an increasing number of states and nations the result of buying less crude oil has resulted in the price increasing to maintain artificially high profits. The problem with carbon restrictions is that many petroleum companies have old out dated refineries (legacy systems) which are not suitable for upgrade and rather then build a new energy efficient refinery it is more cost effective to close it down, which in the short term makes economical sense but long term has implications for midstream delivery thus resulting in another price increase.

The next issue is how investors will read the market and the future impact of OPEC. As instability makes investors nervous; the OPEC response is to reduce the amount of drilling by its members to inflate the price of crude oil. However this is only a short-term fix and pressure from external forces in the form of non-petroleum competition will mean long-term predictions cannot be readily evaluated. As more efficient energy production systems are created in the West, investors look to the petroleum industry for a convincing answer about how they will continue to deliver profitable dividends. One possible option is to increase supply to newly expanding markets, but as the balancing act of increased supply and demand tips towards Asia and Africa then it must also diminish from Europe and the U.S.

The next issue is how to deal with the unexpected supply in gas. In the UK the North Sea provided a large percentage of the gas supply since the 1960s. The United Kingdom Onshore Oil and Gas (UKOOG) group showed figures to say the Norwegian pipeline now delivers over 55% of the current UK gas supply. This has forced the UK government to pass new laws to enable petroleum operators to extract shale gas, with some consternation from locals and protest groups. As a result of an increased gas supply from shale, companies are looking at the viability of producing more gas over crude oil to maintain profits. This has implications for the delivery method of gas and how it is used. If customer centred organisations are not able to provide cost effective mains gas then other markets such as LPG may take the lead, altering the dynamic of many businesses.

With new markets opening up and old markets diminishing a question of how to manage risk needs to be investigated, because if not addressed then investors will seek alternative opportunities. Oil and gas financing requires a lot of money before profits are seen, especially in the E&P stage. Therefore an investor needs to feel confident about the potential for profit and growth. Investment is required for new technologies within the upstream cycle and downstream is heavy reliant on refinery efficiency. Growth within a market can be either aided or hampered by government policy and the contracts in place with the petroleum operators. Furthermore markets where growth is stagnant or in decline need to be managed strategically by diversification. This is vital for petroleum companies to show they are listening to concerns about the environmental impact of oil and gas production and have put in place methods to show investors how future profits will be delivered. This can be achieved through a variety of methods from closing non-profit making onshore rigs and returning the site to its previously unspoilt status and implementing more efficient refineries that produce a lower carbon footprint.

The politics of oil are affecting the behaviour of the market. Public perception certainly influences the policy makers in the West. For more state controlled countries financial implications can constitute a change in direction. Oil companies need to adapt to the changing environment, the landscape today is not the same as it was 50 or even 10 years ago. This means for those directly involved in the industry or indirectly by investment, should clearly share their thinking and strategies on how to maintain the global petroleum market.