On June 21, 2012, Statoil (STO) released its annual outlook for global economics and energy markets. This report provides the company's outlook for the energy industry and markets over the next 30 years. The entire 6 MB PDF file is quite an interesting read and I would recommend that investors in the energy space take a look for themselves.
One prediction that Statoil made in this report is that advances in energy efficiency will slow down growth in demand. The company still expects to see growth in the sector however; it predicts that growth in worldwide energy demand will average 1.1% annually between now and 2040. Demand is expected to increase for all types of energy including fossil fuels. However, Statoil expects "green energy" sources will show much stronger growth than traditional fossil fuels. The company expects that demand for coal and oil will grow at an average annual rate of 0.4% while demand for solar, wind, and geothermal energy will grow at an average annual rate of 7.4%. On the surface, this would seem to indicate that growth-oriented investors would want to favor alternative energy producers over traditional oil and gas companies, but there is more to the story.
Statoil calls natural gas "a fuel of the future" in the report. The company predicts that demand for natural gas will grow much more rapidly than demand for oil or coal. It also expects that demand growth for natural gas will exceed the growth in demand for energy in aggregate. Overall, the company expects worldwide natural gas demand in 2040 to be 60% higher than it is today, which would represent annual average demand growth of 1.6% per year. Statoil itself is a major producer of natural gas and would therefore be likely to be a beneficiary of this trend.
It is no secret that natural gas markets are regionally differentiated due to the inherent difficulty of transporting natural gas over large bodies of water such as oceans. The company expects this situation to continue going forward. However, it does expect that the various regional gas markets will become more integrated with time. This is primarily due to LNG, which does not have the same transportation and storage problems of ordinary natural gas.
Governments themselves are also likely to drive some of the growing demand for natural gas. Natural gas emits much less carbon than either oil or coal when it is burned. The company notes that countries are continuing to impose ever more strict regulations on carbon emissions and expects that they will continue to do so. This regulatory environment will lead to natural gas becoming more and more favored as industries and consumers seek to comply with these regulations.
Despite the company's predictions that growth in demand for oil will lag the overall expected growth in aggregate energy demand, there are still opportunities to profit here. For example, the company cites various tight oil plays in North America as one major growth area for oil production going forward. Companies that have experience in operating and managing shale oil projects are likely to have an advantage over ones that do not. The company also notes that the Canadian oil sands and Brazilian offshore regions are likely to be other sources of growth in the Americas. Statoil has a presence in all three areas and so is likely to benefit from this growth. Canada's Suncor Energy (SU) also offers an excellent way to play oil sands growth. Offshore drilling companies with a strong ultra-deepwater presence offer an enticing way to play Brazilian offshore growth. SeaDrill (SDRL) and Sevan Drilling (SDRNF.OB) are two good options here. Petrobras (PBR) may also be an option but the whole Brazilian oil industry carries significant political risks that should be considered before investing.
The company's analysis seems to imply that high oil prices are here to stay but it stops far short of actually stating this. The company states that full cycle marginal costs are now hovering in the $75-$90 per barrel range. This is an enormous increase from the $30-$35 per barrel where the full cycle marginal costs stood at the beginning of the 2000s. The company also states that, historically, oil prices have been relatively in line with the full cycle marginal cost. It also expects that these costs will continue to increase going forward. If history is any guide then this should exert upward pressure on oil prices over the longer-term. This trend should allow energy investors to profit off of the high and rising oil prices even in the absence of significant demand growth. Even non-energy oriented investors may want to include some exposure to oil in their portfolios as a hedge against their exposure to oil prices as consumers.
The company expects that the actual growth in demand for oil will be higher than the 0.4% number provided earlier in this article. This is because Statoil expects the demand to peak in 2030. However, the 0.4% forward growth rate is the expected rate of growth in worldwide oil demand until 2040. Therefore, the annual expected growth in demand for oil between now and 2030 must be more than 0.4% to account for the flat to declining average annual growth in demand after 2040.