By Clyde Russell
LAUNCESTON, Australia (Reuters) – The crude oil and natural gas industries believe they have got their mojo back, with the overwhelming impression gained at two recent conferences that the future is indeed bullish.
It was hard to find any downbeat delegates at last week’s Asia Pacific Petroleum Conference, the region’s largest annual event, or at the well-attended GasTech in Barcelona the prior week.
However, one advantage of having been around the commodity sector for what seems like ages is that sometimes one can get a sense of deja vu.
The crude and natural gas industries today sound remarkably similar to the coal industry of a decade ago.
In the recovery from the 2008 global recession, the coal industry found itself in the happy place of being in strong demand to fuel robust economic growth in China and India, the two fast-growing economies that displaced Japan as the region’s top importer of the polluting fuel.
The refrain at numerous coal industry events at the time was the outlook is bright because coal is cheap, reliable and necessary to bring electricity to populations in Asia that were rapidly moving from poverty to a more middle-class existence.
This optimism manifested itself in some extremely bullish forecasts, which seem ridiculous with the benefit of hindsight.
Among those was a forecast that China’s coal imports would rise to 1 billion tonnes a year, when they in reality peaked at 327 million tonnes in 2013.
This rosy outlook for coal led the industry to invest heavily in mines to boost the availability of seaborne supplies, which in turn led to five consecutive years of declining prices as supply overwhelmed demand.
But that wasn’t the real problem for the coal industry, what is causing them more problems now is the fact that they didn’t see either renewables and natural gas in their rearview mirror.
A decade ago, coal industry executives dismissed both renewables and natural gas as too expensive, and in the case of wind and solar, too unreliable.
What they didn’t anticipate was that renewables managed to lower costs dramatically as the take up increased, albeit with the help of government incentives in many countries.
The advent of battery storage also appears to be mitigating the problem of intermittent supply, with the success of the world’s largest battery storage facility in South Australia being a case in point.
Natural gas was also happy to sink the knife into coal, especially in the United States with the rise of cheap shale gas.
The natural gas industry could simultaneously claim a price advantage in the United States as well as being less polluting.
The pollution advantage also started to become more important in Asia, with China aggressively pursuing clean air policies that have resulted in natural gas, much of it in the form of imported liquefied natural gas (LNG), displacing coal in residential heating and industry.
To all this, coal was left claiming it was still cheap and reliable, but the sharp rise in coal prices since 2017 has eroded the cost advantage.
Now coal’s major threat is the withdrawal of financing and credit by banks and development agencies, and the curtailing of insurance.
Getting a new, large-scale coal project off the ground is proving increasingly difficult, as shown by Adani Enterprises’ (ADEL.NS> ongoing struggle to start the Carmichael project in Australia’s Queensland state.
In some ways, the only positive currently for the coal industry is that it is very profitable, given high prices and the limited ability to boost output.
But how does this relate to natural gas and crude oil?
Similar to coal 10 years ago, much of the positive outlook expressed by the industry is that they are necessary for economic development, reliable and not easy to replace.
But it’s not too hard to imagine a scenario where renewables combined with storage end up being cheaper than natural gas, particularly in countries that have to import relatively expensive LNG.
Crude oil has a better story to tell, given the current lack of alternatives for much of its use in ships, heavy transport, aviation and petrochemicals.
Even if electric vehicles do claim a large share of the passenger car market, this will only make a dent in the overall demand profile for crude, rather than delivering a potential lethal blow.
The main problem for natural gas and crude is rising opposition from environmental activists, coupled with government policies aimed at limiting fossil fuel consumption.
As climate change rises in the consciousness of the world’s population, particularly the young, every report of record temperatures and unusually destructive hurricanes will be a nail in the coffin of the deniers of the science, many of whom are supporters of the fossil fuel industry.
Just as coal argued it was cheap, reliable and needed, those arguments are unlikely to work in the long term for natural gas and crude.
(The opinions expressed here are those of the author, a columnist for Reuters)
Editing by Christian Schmollinger