The International Energy Agency recently revealed that global investment in energy fell for a second consecutive year, by 12%, in 2016 across all energy types. The largest driver of that decline falls in the arena of fossil fuels – unsurprising, given the low price environment since 2015, dissuading any appetite for big budget spending. Instead, the world is moving towards clean energy investment – hitting 43% of total supply investment, a record high – while the energy sector is increasing focusing on power transmission and distribution, which exceeded spending on oil, gas and coal for the first time.
China, unsurprisingly, remains the largest energy investor. But it too is spending less on oil, gas and coal, and more on power and clean energy. It is also investing a lot on energy efficiency, now ranking only behind Europe in terms of percentage spent. Investment in the US saw a sharp drop – prices were too low for even nimble shale operators to thrive – while the report singles out India as the fastest-growing major market, as it plays catch-up with China in implementing necessary infrastructure to support a billion-plus people.
The drop in spending is, according to the IEA, worrisome. If the trend continues, depressed investment could lead to inadequate supply in the future – triggering another price boom, which will inevitably be followed by another bust, leading to another boom-bust cycle. It isn’t just oil and gas affected; although the share of investment rose, actual spending on global electricity only increased marginally in 2017 (to US$718 billion), while spending on renewable power fell by 3% (to US$297 billion). The shift in percentages largely because spending on upstream hydrocarbons and coal fell to only US$40 billion – half the annual spending for 2011-2015 and a third of the spending for 2006-2010. Only energy efficiency investment rose, to US$231 billion, contributed mainly by the large rise in China.
The outlook for the oil industry 2017 however is projected to be rosier if compared to 2016. With indications that crude prices are stabilising, range bound within US$45 – 55, investments into upstream are being revived selectively. The supermajors have all sanctioned multiple big budget projects this year – ExxonMobil has doubled it acreage in the Permian Basin earlier this year, BP is expanding its upstream spending notably in the US Gulf while Total signed off on the group’s first deepwater projects since 2014. The prospect of LNG in Africa is heating up, with groups like Eni capitalising. Meanwhile, the restructuring of the industry in Brazil following the Petrobras scandal could unlock acreage for foreign investment, finally fulfilling Brazil’s deepwater pre-salt potential. In the Middle East, Qatar wants to expand its natural gas and LNG production as a long-term security measure against touchy geopolitics, and Iran has every bit of ambition to reclaim its oil riches by drilling more.
In some cases, this mood has been offset by pullouts elsewhere – Chevron in Bangladesh and Thailand, ConocoPhillips along with others in Canada’s oil sands region – but the sort of pessimism that clouded the industry in 2016 has been slightly lifted.
In its place is a sort of cautious optimism that the future is brighter. This move to strategic investments than the wanton, mammoth projects of old seems to be the flavour of the day. Spend wisely and spend smartly, as they say. But as the industry refocuses on projects with shorter cycles, instead of projects taking multiple decades, there will be a need to pay important attention to the long-term adequacy of sustained energy supply, noting the recent warning from IEA. For now, at least, it seems like 2017 will be a better year for energy investment.
P.S. For continuity of investments in the energy industry, making the right choices is key for future success. Good templates for decision making processes exist that will allow arriving at such a choice in an orderly and structured manner. Although decisions can even be challenging in the context of limited uncertainty. Read more about “Uncertainty and the art of decision making” a recent blog post by Henk Krijnen.
Henk Krijnen will be in Kuala Lumpur this October 2017, presenting a very timely "Masterclass on Scenario Planning for Decision Making in the Energy Industry". Find out more https://goo.gl/tauq5x. If you are too busy during this period, check out our training series on “Training to Navigate Uncertainty in Oil & Gas”
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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