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IEA: Energy investment stabilizes in 2018
World Energy Investment report says higher upstream spending based on higher oil price, shift to shorter-cycle projects and shale Kristen Nelson Petroleum News
Global energy investment was relatively stable last year at more than $1.8 trillion, following three years of decline, the International Energy Agency said in its 2018 World Energy Investment report, released earlier in May.
The report covers energy broadly providing interesting insights into changes in oil and gas investment.
Higher oil prices underpinned a 4% rise in upstream oil and gas spending, the report says, along with a move to shorter-cycle projects and shale, with 2019 spending plans pointing to a “potential new wave of conventional projects.”
The shift to projects with shorter construction times limits capital risk. The upstream oil and gas industry is bringing capacity to market on average more than 20% faster than at the start of the decade, reflecting better project management, improved economics for shorter cycle technologies and industry competition, the report says.
Upstream oil and gas costs declined 30% over 2014-16, with a slight rebound in the last two years which was lower than the increase in oil prices.
“With more spending on shale and faster time to market for conventional projects, the industry is now better able to reach to changing market conditions,” the report says.
More investment needed “Continued robust demand growth for oil and gas would require a sharp pick-up in approvals of new conventional upstream projects,” the report says.
To meet a trajectory consistent with the Paris Agreement oil spending, which has been lower since 2014, would need to taper further. On the other hand, if there continues to be strong oil demand, investment levels in oil “fall well short of what would be needed.”
For natural gas, supply falls short of levels either under the Sustainable Development Scenario (i.e. consistent with Paris Agreement) or the New Policies Scenario (continued strong oil demand).
Modest rise in 2019 Investment in global upstream oil and gas is set for another modest rise this year, the report says.
Spending in the aggregate was slightly above guidance companies provided to the market in 2018, and IEA said it has revised its 2018 estimates for the rise in global upstream oil and gas spending from 5% to 6%, with a global estimate of $505 billion for 2019, up 6% in nominal terms, 4% in real terms, from last year.
This figure is still nearly $300 billion lower than the peak reached in 2014.
But upstream costs have dropped since 2014, the report says, and after adjusting for costs, the 35% reduction in nominal spending from 2014 to 2018 becomes “a much smaller 12% fall in activity.”
The report says the main upstream story in recent years has been the shift to spending on shale, tight oil and shale gas, in the United States.
IEA said in its view the fastest growth in upstream investment this year will be conventional projects, rather than shale, which has leveled off at about a quarter of total upstream spending.
Reaction to lower prices The report says large conventional operators have reacted to lower prices since 2014 in four ways:
*Maximizing revenue from existing operations, with the share of brownfield spending rising to 67% of the total in 2018 from less than 60% in 2016;
*Cutting costs whenever possible;
*Putting more focus on smaller assets - notably shale - that can be brought to market more quickly; and
*Deferring spending on more complex new projects “until they are redesigned and simplified to be competitive at lower prices.”
The two-thirds share of total spending in 2018 going to conventional projects with a historic low, the report says, with offshore projects squeezed hard, and that portion of spending falling by more than 10% between 2016 and 2018.
Shale reached 26% of upstream investment in 2018, but IEA says it expects a marginal decline, to 24%, this year “as the reduction of investment anticipated by shale pure operators is only partially compensated by rising spending in sale basins announced by some of the majors.”
Diverging trends in US Over the last 10 years the U.S. share of global upstream spending has risen from 17% to 24%, the report says. IEA expects this trend to be checked in 2019.
U.S. independents have divergent investment strategies, with increased demands for capital discipline and investor returns capping spending by independents, especially for those operating exclusively in shale plays. But a large inventory of drilled but uncompleted wells will likely allow continued robust production, the report says.
International oil companies, on the other hand, have maintained or increased upstream U.S. plans.
“Exxon and Chevron have made the Permian Basin a centerpiece of their strategies, while Shell and BP are increasing their positions,” giving majors a greater role in U.S. supply and possibly encouraging further consolidation.
IEA said 2019 is on track to be “the first year where investment growth in shale assets passes from independents to big oil companies,” something the report calls “a remarkable change” for an industry sector which has been dominated by smaller companies.
Changing trends The report notes that since the 2014 downturn the industry has moved away from large, capital-intensive projects with long lead times, in favor of fast-tracking smaller projects or dividing larger projects into phases.
“Lead times for new projects have fallen sharply,” the report says.
The move to smaller, standardized projects, has a “strong accompanying focus on efficiency and capital discipline,” but also means the industry is increasingly relying on assets with a quick cash flow but faster depletion, which could increase market volatility.
Exploration investment is set to rise to $60 billion in 2019, up 18%, the report says, although the share of exploration in total upstream spending “remains almost half the level in 2010.”
Companies were reducing exploration spending even before the 2014 oil price collapse, a trend accelerated by the price drop, with exploration spending dropping by almost half between 2014 and 2018.
The report says companies are expected to continue to keep exploration under close control this year, but “the anticipated increase would be the first one since 2010.”
As with other sectors of the industry lower funding has “driven the deployment of more efficient rigs and a decline in the cost of seismic surveys, ultimately leading to an overall reduction in the average project break-even.”
The reduction in exploration activities also resulted in “a massive reduction in discovered resources,” the report says, with an average of 5.2 billion barrels of oil equivalent of conventional discoveries annually between 2014 and 2018, two-thirds lower than the average over the previous decade, with a similar trend in natural gas discoveries.
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