Oil demand peaks in 2030, but much slower decline than anticipated- BloombergNEF

And my take coming into this conversation with David Doherty, who is the head of oil and renewable fuels for Bloomberg NEF, is that it was going to be an earlier peak and a more rapid decline, and I think the what really pushed me in that direction was the transformation of the auto sector, which, of course, is, you know, responsible for most of the men, for, road fuel. And it's just I saw a Reuters story just not that long ago, that said, $1,200,000,000,000 committed by the transportation sector to electrify. I can't remember if it was 2030 or 2040, but it's a big number. And, clearly, most experts I've talked to are surprised at how quickly, the auto sector is switching over to electric. And so that's influenced my thinking.

But it's not my thinking that matters. It's David. So we're gonna welcome him to the interview.

Now this is we should point out, I guess, for listeners that your the analysis we're gonna be talking about today, was originally done last year, but you're gonna update it a bit because you've got some some, another report coming out in a couple of months. But so we'll my I am looking at your, the first, graph, in your report and an oil peak demand in 2035. What's what's your take? How did you arrive at 2035, and have you modified it since the report first came out?

So the way that we view it is that there's a peak of decline and more of a plateau towards the back of the curve. So it slows down once the transport the road transport sector specifically has, you know, hit peak decarbonization or as well on its way. In our new report, actually, this moves forward to a 2030 peak. So 5 years forward. And and a lot of that is down to the change in policies and the encouragement of electric vehicles and road transport, but also in the heavy trucking sector, decarbonization of that as things move towards hydrogen, but also hybrid and electric trucks.

So there's big changes in that side of things. Again, encouraged by European Union policy. We'll see another encouragement coming along in form of the the US policy, the in in inflation reduction act. So everything that we do every single year, every time we do this exercise, the peak comes slightly closer because policies are shifting towards that. And regardless of the outlook you look at, if it's the IEA, if it's OPEC, that that's what you see.

The the risk is that it's to the downside. There's there's less oil demand normally because people see these forecasts and say, oh, that's not in line with anything we wanna do to get towards whether it's 1.5 degrees, 2 degrees, even 2.5 degrees. So let's change things and bring that forward.

These changes that we spot in the short term. So last year, for example, we underestimated what would happen in the electric vehicle sales market, particularly in Europe, and it surprised to the upside massively. That changes where you start your ideas from, where you start your modeling from. And, of course, then that flips over the electric fleet into the internal combustion engine fleet on the road much quicker. And that really is what impacts the the year that peak happens.

So we brought it forward last year because we saw a lot more electric vehicles in the car fleet for passengers, but also in the the trucking fleet. So if you look at sales figures for light duty commercial vehicles, for example, in South Korea this year, they're already in the double digits. These are delivery vans, small sized trucks. They consume an awful lot more fuel than you or me driving a passenger vehicle, right, particularly in Europe where we have much smaller vehicles. So, yeah, the the risk is that it comes forward, but there is there is a, a point that we're passing your vehicles where we're seeing most of the activity, try to make less impact.

Right?

Electric is, you know, not there yet. Hydrogen is not there yet, but they're being spoken about by the likes of Boeing and Airbus, for example. And the only real functioning alternative that we could use now to decarbonize is sustainable aviation fuel. So this is basically a biofuel replacement for standard jet fuel, jet a one. And this is growing hugely hugely in popularity, particularly in in the West Coast of the US with the low, California low carbon fuel standard.

But also with the introduction of Canada's fuel standards this year, though you're seeing a lot more activity there. And I think we'll see a lot more. So a lot of the refineries in the world who are used to producing diesel, gasoline I mean, they see the writing on the wall. And a lot have converted to producing, renewable fuels. So renewable diesel, which can carbonize really heavy trucks.

It's a one for one replacement. And then sustainable aviation fuel, which can decarbonize the aviation, market. Even still, there are limitations to what we can do for that, and that's because we require feedstocks and different technologies to scale this. So at the moment, what we can do is use things like you could, in theory, use feedstocks like canola oil, tallow. But used cooking oil is one of the most popular feedstocks for this.

And there's only so much used cooking oil and fat that we can pump into these refineries in order to make sustainable aviation fuels. And the more you use of that, it pumps up the price of those feed stocks. Right? So you don't get these economies of scale that you're getting in the transport market where the more electric vehicles come online, generally, the cheaper they become to produce. For this one, you're looking to put more of, a limited feedstock into a refinery to get sustainable aviation fuel.

So there's a jam there when it comes to getting that price down. So it's far more expensive to put sustainable aviation fuel into an airplane than to just put jet fuel into an airplane. So we need new technology to make that cheaper. And that could be, municipal solid waste forestry residue, putting that in instead. That is a new technology.

So it's going that direction for sure. But, again, it's a cost it's a cost problem. Airlines don't make a huge amount of money. They're not big oil players. They don't have a lot of spare margin to play with.

So it's difficult. Right? It's difficult for them to put that in and also be competitive. If you're, for example, Air Canada flying to Japan and Canada in in implements a mandate, but Japan doesn't, how are you gonna compete on that route with, say, all Nippon Airways? So there's a degree of difficulty there in getting it in, but Lance to Tech, which is the Lance to Jack that today focusing on this market, super popular.

Suncor in in Canada, are partnering with them. I mean, the list goes on of companies partnering with this technology. So I think it's one of the more promising ones for sure.

And, do you see that that trend continuing? I mean, these were huge refiners, if I remember correctly, at 400,000 barrels a day, something something like that. And does that have any I mean, you're you're forecasting let me see. At least a doubling of the chemical food. No. Maybe not quite that much. But, anyway, 50% or more increase in demand for chemical feedstock. So is is that is those big petrochemical complexes, is that part of the explanation?

They go into things like airplanes for the same logic. So it's it's a strange one in that More petrochemicals demand might actually mean that there's less consumption of other fuels because it's an efficiency gain. The boom that you're talking about in building out these huge, huge plants has pretty much slowed down. There's a saying where it's like there's no cure for high prices, like high prices. People pile into the market and then send prices down, which is pretty much what's happened there.

So you're seeing a drop of petrochemical margins. But I think for now, we'll see a bit of a pause in that in that story. But they're mainly built out of Malaysia, Southeast Asia, and and China, like you said.

Think of the Unilevers and the Procter of Gamble's of the world. Having a recycled plastic is almost a demand of the customer now. And therefore, buying recycled or a bioplastic of some type and being allowed to market that on your packaging, let's say, is is a good thing. Therefore, they're willing to pay more. Right?

Plastics in general should you know, the the goal of a plastic is that it shouldn't be burned and therefore that c o two shouldn't be emitted into the world. Like you said, it's not not always the case, but also there's a problem of where you dump it, where you where you throw it out, and it generally tends to find its way into the ocean. So that is a big problem. The end life management of the in the plastic sector or what we often hear about as circularity or a circular economy is a huge trend. And there's a lot of technologies that can take that waste, recycle it, and turn it into things like either diesel or recycled naphtha.

And we're seeing huge trends in that space, particularly supported by large consumer businesses. We have this thing where we have you know, at the end of the life of your car, you bring it back, it gets recycled, and it gets, crushed down and the metal is used again. We we don't have the same systems in place for the the, majority of plastics that we use. They get mixed in together. There's different types of plastics that makes it really hard to separate those streams and to turn them into something that can be used again.

So it's problematic. It's not unsolvable, but it's not a well organized system like we have, say, in the auto in the auto sector. So that that will definitely disrupt demand. But, actually, funnily enough, at the moment, you have this premium for recycled feedstocks. So it's more expensive to buy a secondhand or sorry. A second life feedstock because of that end use want and the end use demand for it. So that again is problematic in terms of the economics.

Will that be will the exports of that product be stopped if they develop a domestic industry? Where does all of the trash in the world go to? Will we be allowed to buy it? Will we be allowed to send it there in the 1st place and buy it back? How does it work? And then it comes down to things like what's the color of plastic, even smaller sizes of that. Is it PET, or polystyrene, for example? How do you separate those out? One might be black. One might be clear plastic.

You know, the the list of this one goes on, and there's so many small tedious parts that make it really difficult to get that to operate on scale. So far, it's been done, but it's much smaller scale.

And they've got some pretty strict or some pretty ambitious targets already. The problem, however, is that there's possibly too many options to decarbonize that segment. You can use, green ammonia. You hear of methanol. You hear of LNG as an interim solution.

Different grades of oil. Now the problem is if you're a port and there's 8 options to decarbonize, you only have so much space. You only have so many tankers. You've only got so much infrastructure that allows you to refuel these and so many places to put these new technologies. Right?

And so what the sector really needs to do is think about what kind of ships require what kind of powering. And what I mean by that is it's a cargo ship that kinda operate like buses, right, between the port of Los Angeles and Shanghai, for example. They go back and forth pretty much. It's quite predictable. Oil tankers, on the other hand, might be signaling that they're going from Antwerp to New York Harbor and halfway across they switch and they go somewhere else.

You need to know what infrastructure is in place at the other the other end of your destination so you can refuel and get back. So there's a lot of options there. The difficulty is there hasn't been anything settled on yet. But you are hearing from the likes of Maersk that they're buying and building ammonia ships, for example. But each of these comes with its own problems in terms of, like, leakages and toxic gases and and other risks.

So too many options almost. And the market is so segmented. A bunker, a bunkering hub has container ships coming through. It has oil tankers, chemical tankers, roll on, roll off, ships, bulk carriers. So this vast this market is actually about 8, 9 different markets and a smaller, that are much smaller than that and probably are all suited to different types. So that's a really interesting one, and we're actually publishing our shipping outlook this week that jumps into that a little bit more.

It's not quite quite comfortably, let's say, at this stage. The world is kind of agreed that that technology can scale and works. Right? The other part, however, is, residential, commercial, and and industrial. So that is, me and you having an oil home heating system, for example, or using LPG as a cooking oil in India or in Africa.

It's all of these technologies that fuel the use of our sort of normal day to day lives. But there are alternatives, but it comes as what comes first, and that's why it's flat. So you see, for example, in India, LPG was a huge trend over the last few years as the government brought in an initiative to provide LPG for people to cook and to to heat their homes. Previously, they may have burned wood, for example, which is heavier in terms of carbon emission. LPG is that replacement.

And there are other replacements for LPG, but as as it stacks itself along that, replacement chain, as it moves towards decarbonization, that gives you that flat line from the residential side. And then you get into other things like there's there is fuel required in many refineries. There's fuel required in many petrochemical plants. In the agricultural sector, for example, because obviously diesel is quite a, a large part of that. So there's beyond the 4 main sectors which move the most, there are smaller sectors that have things going on, but they're much smaller in terms of the scale.

The industry has been saying, you know, if there be if there isn't adequate investment in in exploration and production, we're going to have an energy crisis. Well, here we are. And it doesn't and we still are having problems because the Americans, shale producers, they they don't wanna boost their production. They don't wanna spend they don't wanna invest and spend capital. The, OPEC, plus just cut back by 2,000,000 barrels a day.

And where are we going with this? And and, is this is this trend of underinvesting in order to prop up prices, is that likely to continue?

So previously, they had borrowed to drill, and now they're they're drilling to pay down borrowings as opposed to, doing the opposite again. The the benefit of those kind of plays what I mean by plays or shale plays is the market is shifting towards this value over volume model, with an ideal lifetime being shorter. So a short life cycle in terms of investment. So big, big, big offshore or arctic drilling projects, for example, which require lots and lots of capital and then require a long period of time to pay back, are far less attractive and far higher risk now than they were before because of this declining demand curve and because of investor pressure. If you look at the European oil producers, for example, they are facing a lot of heat to move away from high carbon production.

Likewise, in Canada, sands are some of the most heavy emitting oil barrels that you can produce. So they're facing pressure from investors. And when you're seeing some different types of regulation like CORSIA in the, in the aviation space coming into play, starting to think about the life cycle emissions. So out of the ground and into the use, these things start to trickle down and make an impact. So, yeah, there there is there is a huge risk of short term pain, particularly from something like this Russia Ukraine war where all of a sudden, all of the chips are thrown up into the air.

We're waiting to see where they land, versus looking at it in a longer term perspective as to when we might need that barrel to fall off. Because, ultimately, oil and gas companies don't wanna invest and not reap the repayment over the lifetime of that and have something shut in before, before the end of its actual life cycle of having a stranded asset. So there's a huge fear there, for for oil majors.

But the the point here is that all your cap a lot of the capital that you're gonna use over the life of a project gets spent at the beginning of the project. And then the amount of capital that you require over 30 to 50 years while you're producing it is very, very little. You're main you're maintaining and repairing. You're doing some brownfield development, you know, to increase production, but you don't have to go to Wall Street. You don't have to go to Bay Street and beg for capital because you just don't need.

In fact, if you look at the cash flow forecast for the oil sands companies, Canada, they they if if they wanted to, they could probably self fund, all of their, all of their capital requirements, at least this year and and probably next year. So the it's and this is about 4,000,000 barrels of production, a day. But that is very different, isn't it? And it's not like it's not like the Americans. It's not like the North Sea.

It's not like the Saudis. It's and and there, it it production does follow capital investment. Correct?

And and they're gonna and the intent what they're telling investors is they're gonna drive it down even further into the twenties, maybe, say, 25 to $35 a barrel. And then that's a pretty competitive barrel. So is that the perception that you have and that other, you know, other markets, you know, in Europe and in Asia, is that how you think about the oil sands, or is it something else?

Right? You gotta get them you have the infrastructure to be able to bring it to where it needs to go. There is obviously the natural offtake in the United States, shipping shipping oil down. And refineries in the United States are fairly well placed to process Canadian sand. So as the likes of, you know, Iranian and Venezuelan barrels, those heavy and meteor barrels are out, that suits the mix.

That works quite well. And internationally, though, I think what's changing is the cost profile pressures, and moving towards the carbon profile pressure. So if you look at many scenarios like the International Energy Agency's net zero scenario, there is a scenario there where they try to limit stranded assets. So that means keeping, say, the sand operating. But to do that, you've gotta invest in order to decarbonize it, which, you know, limits the decline cost that you can or the decline in cost that you can achieve.

So there's a huge challenge to decarbonize it if that was, for example, the world we're going to go towards. But there are technologies. And like you said, because it's a unique kind of production process, more like mining, the mix between mining and oil production, let's say, there are there are almost synergies to be gained from the mining sector and how they're carbonizing. So it can be done, but there's the there's the problem of relative cost declines. Everybody's trying to decline, to set their set their costs then and then and then getting it out to where it needs to be.

There's no use in just being able to take it out and send the to the US if there's demand elsewhere and you're adding layers of pipeline or transaction fees or transport fees, storage fees, and then ultimately exporting it on a ship in the gulf somewhere. That's really where the the the getting Canadian barrels to global markets is is is a bottle is a bottleneck there.

And Venezuela production Venezuelan production has, like, fallen off a cliff. It it and Mexico has announced that in 2024, it's gonna withdraw 600,000 of Mexican Mayan, so heavy crude, from the market, so they wanna process it domestically. If I'm looking at that as an oil sands producer because traditionally, they wanted other markets. They wanted to get away from relying on the the Americans. They had such a big discount because the, but now it almost seems like there's a maybe supply shortage or at least a pressure on the market supply pressure.

And the American market actually looks pretty good going forward.

We spoke earlier about renewable aviation fuel and diesel. A lot of refineries are incentivized through policies to switch to producing things like sustainable aviation fuel, and it's more economic to do so. So you're seeing some mega refineries that are either earmarked or that have already closed, and that that's for a, a heavy producer or something to look at. And the the the story around, the Venezuelan barrels are you know, that that is correct, but there's always a risk that they came back to the market. They haven't gone.

They would be slow to come back, but, I mean, stranger things have happened. Right? We have 3 3 of the largest producers in the world that are now sanctioned, and the world's reeling from oil price inflation. What's the lesser of the evils, I guess, is is the answer. Would would they allow Iranian barrels back?

Would they allow Venezuelan barrels back? Probably not going to allow Russian barrels back anytime soon. So there's a lot of battles being fought on a lot of fronts. So Sure. I'm not sure it'd make a hugely long term investment based off of a policy. That's a real risk, I think.

What does net zero mean for collapse in for oil demand? And and you've got the same kind of kind of curve here. And the betting always is, well, our government's serious. I mean, a, are they gonna make the commitment? And then, b, are they gonna follow through with that?

And let me let me say right up front, Canada is the king or queen of talk is cheap. We make all kinds of promises, and, you know, we're still one of the the highest emitters per capita in the world. And we, you know, we have not we basically had plateaued our GHG emissions, and that's the best we can say, at this point. So what's your what's your take on this, you know, the likelihood that that policy will actually destroy some or a lot of demand for oil?

Actually, in our in our net zero scenario that Colin would have spoken about, when he was speaking to you last, we kind of go slow until 2030 and then accelerate. Yeah. All of the different net zero worlds and scenarios that you look at from all of the different providers have very different assumptions. It could be that we all live in tiny houses. It could be that we have a much smaller population.

So when we don't know what the world looks like in in any of these scenarios, and we can only use those as sort of a gauge to the direction to move from, either way, we're already really slow. We're already behind, and policy is not pushing, fast enough. In many cases, it's pushing in the right direction. But also policy policy doesn't wanna go too fast because in many of the big markets, the US, Canada, Europe, pushing too fast in policy loses the vote. And before you know it, there's strikes, diesel costs onto the roof.

They're around the it goes on. Lorry drivers have stopped. It's a very delicate balance on the way down, but absolutely policy is not keeping up with the claims the politicians are making. But I could see why that's happening. It's just it's a shame that that comes down to fear of peace and power, but really at the end of the day.

So what I wanted to tell you is is inner global energy system inertia. This is something I hear economists talk about all the time, you know, arguing for a slower a later peak demand and a slower decline is the global energy system has just become it's so big, and we're so dependent on it. And there are so, you know, so many 1,000,000,000,000 of dollars of assets have been built that are still economic that we're reluctant to to strand or to or to, you know, recycle, get rid of. And and that kind of inertia is really hard to overcome. And given the fact that you're in the modeling business, no doubt you've put some thought into the role that inertia plays.

What's your take on that?

Or apply price decline significant again to cause some pain. If it's managed from the demand side and 2020 being a crazy demand shock of a big decline in demand, that doesn't generally happen in a normal world. A gradual decline causes this to solve its solve itself or at least to solve itself slowly so that there's less of a pain. That said, I'm a big proponent of finding uses for many of the assets that are already built and in place. We have to be really smart about what our pensions are linked to, what all of our investments are added into.

It's great to say, let's move towards a net zero world. But if, you know, Canada Pension Plan tomorrow was worth 0 and couldn't pay out any of their policies because they had invested into a bunch of refineries or oil sands, That that's another problem. So everything causes another problem, and it's really trying to guess what the next problem or the knock on effect of this decision is. So I think there needs to be a pragmatism of the thing to how we can repurpose things. So that could be, again, turning it into renewable fuel plants.

If it's a refinery, moving it towards net zero production to be the last barrel standing, so to speak, or using it as a storage facility. There are some options. We're quickly running out of options if they want to shift them into. But I think we have to have a sort of pragmatism so that we don't spook people. Because if we're if we're not pragmatic about that, you spook people and they will not get involved from the beginning.

And then we're we're nowhere. You know, we're not getting any better. So

So if you took out 1 and a half to 2,000,000 barrels a day, what does that do to price? If you take out 5, if you take out 10, if you take out 25, and now you have you still have that 100,000,000 barrels a day of supply chasing around after customers, does that does that mean that once the demand sets in, that prices are likely to crash?

Ultimately, it's a supply demand economic equation. Right? But, yeah, absolutely, should this happen, you will have barrels that need to chase at home. And if not, it's then perhaps worth shutting in that production. And there will be you know, I think in any of these scenarios, there will there will be stranded assets.

It's it's which ones and then it's, how is that followed or who pays for it. And and you're seeing this in lots of commodities across the world. You've got the Indonesian government working with international philanthropists and societies to work out how do we stop our coal plants from working, but also who pays for that? We've got huge amounts of coal generation assets. We're gonna close them maybe, but maybe and then who pays for that investment?

How does that work? This transition financing is a real key question, I think, around the world for all these different types of assets.

I mean, there's just it seems like the landscape is changing so quickly, either at the technology landscape or customer preferences in the case of EVs or or or government policies. I mean, my goodness. So much could change between them now and the next time we chat. But I did enjoy this chat, so thank you very much for that.