Energy, industry, and the economy

Macro lunch, NHHBergen, 11 November 2013

Klaus Mohn, professor of petroleum economics(klaus.mohn@uis.no, UiS homepage, Twitter: @Mohnitor)

Global and national perspectives

My researchSelected publications

Hunnes, A., Kvaløy, O. og K. Mohn. 2012. An empirical study of performance appraisal and career opportunities. International Journal of Business and Management 7 (1), 22-35. Mohn, K. and B. Misund. 2011. Shifting sentiments in oil and gas investments: an application to the oil industry. Applied Financial Economics 21 (7), 469-479.Mohn, K. and P. Osmundsen. 2011. Asymmetry and uncertainty in capital formation: an application to oil investment. Applied Economics 43 (28), 4387-4401. Aune, F. R, Mohn, K., Osmundsen, P. and K. E. Rosendahl. 2010. Financial market pressure, tacit collusion and oil priceformation. Energy Economics 32 (2), 389-398.Mohn, K. 2009. Elastic Oil: A primer on the economics of exploration and production. In Bjørndal E. and Bjørndal, M. Energy, Natural Resource and Environmental Economics. London: Springer. Mohn, K. and B. Misund 2009. Investment and uncertainty in the international oil and gas industry. Energy Economics 31 (2), 240-248. Mohn, K. 2009. Autism in economics: a second opinion. Forum for Social Economics 39 (2), 191-208. Mohn, K. 2008. Efforts and Efficiency in Oil Exploration: A Vector Error-Correction Approach. The Energy Journal 30 (4), 53-78. Mohn, K. and P. Osmundsen. 2008. Exploration economics in a regulated petroleum Province. Energy Economics 30 (2), 303-320.Osmundsen, P., Mohn, K., Misund, B., and F. Asche. 2007. Is oil supply choked by financial markets? Energy Policy 35, 467-474.Osmundsen, P., Asche, F. Misund. B., K. Mohn. 2006. Valuation of international oil companies. Energy Journal 27 (3): 49-64.Osmundsen, P., Mohn K., Emhjellen. M., and F. Helgeland. 2005. Size and profitability in the international oil and gas industry. Jerome Davis (ed.) The Changing World of Oil. An Analysis of Corporate Change and Adaptation, London: Ashgate Publishing.

Mohn, Klaus. 2008. Investment behaviour in the international oil and gas industry: Essays in empirical petroleum economics. PhDthesis. University of Stavanger.

Energi, economics and the environmentThe energy trilemma: 3E sustainability

• Economic activity– Growth and employment

– Aspirations for welfare

• Energy for all– Reliability

– Affordability

• Environmental concerns– Local pollution

– Global warming

Globale energy outlookPressures are building, no resolution in sight

• The oil price is record high– Dampened activity and energy demand

– Higher investment and production

• The energy system is changing– Unconventional oil and gas

– Setback for nuclear energy

– Focus on energy efficiency

• The system is short on sustainability– Fossil fuels are heavily subsidised

– GHG emissions are yet to peak

– 1.3 bn people still lack electricity

– Water is increasingly scarce

From economic activity to energy demandCurrent instability – a source of risk

Kilde: IHS Global Insight, International Energy Agency og Statoil (Energy Perspectives 2013; projections).

Gradual greening of energy mixCO2 emissions could to peak around 2030

Global CO2 emissionsGiga tonnes

Sources: International Energy Agency (historical data, Statoil (2012; projections).

Global energy mixShare of total primary energy demand (%)

0

20

40

60

80

100

1990 2000 2010 2020 2030 2040Renewables Nuclear Gas Oil Coal

0

20

40

60

2010 2020 2030 2040

International bunkersOther non-OECDNon-OECD AsiaOECDIEA NPIEA CPIEA 450

Source: International Energy Agency (World Energy Outlook 2012).

20

22

24

26

28

30

32

34

36

38

2010 2015 2020 2025 2030 2035

450 Scenario

New Policies Scenario

What it takes to stop global warmingBreakdown of IEA’s 450 scenario

Global CO2 emissions 2010-2035NP scenario and 450 scenario compared

(Annual CO2 emissions; giga tonnes)2020 2035

Activity 2% 2%

End‐use efficiency 18% 13%

Power plant efficiency 3% 2%

Electricity savings 50% 27%

Fuel and technology switching in end‐uses

2% 3%

Renewables 15% 23%

Biofuels 2% 4%

Nuclear 5% 8%

CCS 4% 17%

Total (Gt CO2) 3.1 15.0

What will it take?CO2 abatement efforts and potential by source (%)

The oil price matters…… for consumer, producers, and politicians

Oil price reviewBrent blend, USD/bbl (2012 prices)

0

30

60

90

120

150

1970 1977 1984 1991 1998 2005 2012

• 4-fold increase since 2000– Late level 2 times historical avg.

• Impact on demand– Income effect

– Substitution effect

• Impact on supply– Conventionals (exploration,

development, production)

– Unconventionals

• New technologies• Policy response

Source: Reuters EcoWin, Rystad Energy.

0

50

100

150

200

250

300

350

2001 2003 2005 2007 2009 2011

RussiaEuropeNorth AmericaSouth AmericaAfricaMiddle EastAsiaAustralia

Offshore supply servicesby global region, USD bn (nominal)

0

20

40

60

80

100

120

0 10 20 30 40

Demand expectation

Global shale oil

Additions to long-term oil supplyStylised marginal cost by resource type (USD/bbl)

Shale shock to oil price formation?Potential implications for oil price formation

Sources: Source: US Department of Energy (EIA), various consultancies.

Additions to long-term oil supplyStylised marginal cost by resource type (USD/bbl)

0

20

40

60

80

100

120

0 10 20 30 40

Demand expectation

US shale oil

Demand setback

The oil price mattersDiminishing impulse from oil price change

Outlook for NCS oil and gas productionNPD forecast by year of release (mboepd)

0

1

2

3

4

5

6

2000 2005 2010 2015 2020

200120032005200720092011Actual

Source: Norwegian Petroleum Directorate.

-4

-2

0

2

4

6

2001 2003 2005 2007 2009 2011

2020 production (mmboepd)Average annual growth (%)

Outlook for NCS oil and gas productionNPD forecast by year of release (mboepd)

Investment choked by financial marketsWhere NPV may fail, Cash will prevail

Source: Enskilda Securities (Oil companies’ E&P budgets, 20 August 2013).

Industry changes and challengesA race between scarcity and innovation

• Innovation and cooperation• Changes in OPEC behaviour• Uncertainty over gas prospects• Break-up of monopoly in transport• Quality in capital allocation• Re-direction to Asia• Energy and climate policies

Source: Mitchell, John, Marcel, Valerie and Beth Mitchell. 2012. «What next for the oil and gas industry?». Chatham House. October 2012.

0

50

100

150

200

250

Finnmark: 500Troms: 900Nordland: 1 900

Oppland: 40Hedmark: 100

Vest-Agder: 6 200Aust-Agder: 2 700Telemark: 3 000Buskerud: 7 900Vestfold: 4 000

Akershus: 13 300Oslo: 4 600Østfold: 1 400

Nord-Trøndelag: 3 600Sør-Trøndelag: 8 100

Møre & Romsdal: 17 600Sogn & Fjordane: 1 500Hordaland: 46 500Rogaland: 80 000

Kilder: Ringvirkninger av petroleumsvirksomheten, Konkraft-rapport nr. 7 (http://www.konkraft.no), Vatne (2007).

Petroleumsrelatert sysselsetting 2012Totalt: ~ 220 000 personer

Mange arbeidsplasser i hele landetAnslagene varierer mellom 40000 og 220000

Under-leverandørerLeverandørerProsesseringOljeselskaper

0 5 10 15 20 25

Vestlandet

Sørlandet

Østlandet

Midt-Norge

Nord-Norge

Hele landet

SSB (2010)

Konkraft (2009)

Vatne (2007)

Finnmark: 500Troms: 900Nordland: 1 900

Oppland: 40Hedmark: 100

Vest-Agder: 6 200Aust-Agder: 2 700Telemark: 3 000Buskerud: 7 900Vestfold: 4 000

Akershus: 13 300Oslo: 4 600Østfold: 1 400

Nord-Trøndelag: 3 600Sør-Trøndelag: 8 100

Møre & Romsdal: 17 600Sogn & Fjordane: 1 500Hordaland: 46 500Rogaland: 80 000

Kilder: Statistisk sentralbyrå, Vatne (2007), Konkraft-rapport nr. 7 (http://www.konkraft.no), Vatne (2007).

Petroleumsrelatert sysselsetting 2012Totalt: ~ 220 000 personer

Mange arbeidsplasser i hele landetAnslagene varierer mellom 40000 og 220000

Research agendaThemes of relevance

• The global energy outlook• Is 3E sustainability feasible?• Policy requirements and implications

• Oil and gas market and industry outlook• Supply, demand, price formation• Industry dynamics & developments• Capital market interaction

• Oil and gas in the Norwegian economy• Industry activity• Macroeconomic challenges• Asset management• Policy design

Global energy outlook

«Energy markets in 2030»Oslo, 1 November 2013

Klaus Mohn, professor petroleum economics(klaus.mohn@uis.no, UiS homepage, Twitter: @Mohnitor)

Thank you for your attention!