A new analysis of oil demand forecasts from the world's leading energy agencies has uncovered a significant emerging risk for international oil companies investing in Canada's environmentally destructive tar sands. The report, entitled Shifting Sands, calls into question the long term profitability of unconventional oil assets due to major downward revisions of growth in global oil demand over the next decade.
The findings cast doubt on the long term investment strategies of oil majors BP and Shell in the same week that both are expected to post disappointing quarterly results - BP on Tuesday and Shell on Thursday. The report claims that Shell is uniquely exposed to oil price volatility, as over 30% of its oil resources are classified as unconventional, requiring a consistently high oil price to remain viable. It further questions whether the high oil prices needed to sustain tar sands production will ever be withstood by the economy.
The report, co-authored by PLATFORM, Greenpeace and Oil Change International points to a series of trends emerging from the growth forecasts of OPEC, the IEA and the EIA as evidence that the oil market could be undergoing a permanent structural shift.
The authors assert that previous oil demand growth forecasts have seriously underestimated the potential impacts of Government policies aimed at securing energy supplies, reducing price volatility and tackling climate change. This ‘triple crunch' of political imperatives has led to a widespread dampening of expectation among the world's leading energy analysts.
The report's main author, Lorne Stockman, commented:
"The investment risks associated with tar sands projects are increasing almost daily. The potential impact of major efficiency programmes on oil demand is only just being realised, as Governments around the world attempt to reduce price volatility, secure energy supplies and tackle climate change.
"Investors should be aware that the assumptions they made just one year ago could now be well out of date, and they should think carefully before committing to projects that require a consistently high oil price to break even."
OPEC has revised its 2025 oil demand forecast down by 12% within the past four years, while conceding that "there is probably a need to continue to revise projections downwards because policies are geared to reducing demand". The IEA warns that "even under conditions of strong economic activity, greater efficiency advances could still result in lower oil demand growth."
The analysis also quotes a recent speech made by BP Chief Executive Tony Hayward, in which he declares that "BP is unlikely to sell more gasoline ever in the United States ...than it sold in the first half of 2008". Hayward also draws attention to the increased elasticity of demand as high oil prices begin to affect consumer behaviour and vehicle efficiency legislation is passed in congress.
The report explains how the US has the potential to reduce its oil use by up to 10mb/d by 2030, mainly though the use of mandatory vehicle efficiency standards. China has introduced significant consumer incentives for smaller cars and is gearing its automotive industry towards the production of smaller, more efficient engines. The report also points out that the emerging economies are leading the world in the development of batteries and other low carbon technology.