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New IEA report highlights energy trends Survey of energy investment in 2015 shows impact of low oil prices, increasing interest in renewables and energy efficiency ALAN BAILEY Petroleum News
The International Energy Agency has published the first edition of a new annual report overviewing worldwide investment in energy. Called “World Energy Investment 2016” and characterized by the IEA as “a first ever detailed analysis across the global energy system,” the report presents data for 2015. In that year investment in the energy sector totaled $1.8 trillion, a drop from $2.0 trillion in 2014, the report says.
This drop in investment mainly resulted from a sharp fall in upstream oil and gas investment. China retook top position from the United States as a destination for energy investment, largely as a result of record levels of investment in the electricity sector. While the rebalancing of the Chinese economy is weakening Chinese energy demand, the dominance of the service sector in the economies of Europe, the United States and Japan is tending to delink energy demand from economic growth. Moreover, major investment in energy efficiency is re-enforcing these structural changes, the report says.
Oil and gas In 2015 oil and gas continued as the largest single energy sector for investment, accounting for more than 43 percent of the investment total. But investment in the electricity sector rose to a record $690 billion, a figure representing 37 percent of the total.
Oil, the largest primary energy source, increased its share of the global energy mix, but with investment in the sector declining in response to low oil prices. Gas demand, on the other hand, remained subdued, because of a slackening electricity demand and an expansion of electricity generation from renewable sources. Because of low oil and gas prices, investment in upstream infrastructure dropped, while most major gas infrastructure projects in the East African and Eurasian regions faced delays. Coal demand declined, especially in China and in the United States. However, strong investment in coal in India supported coal production there.
Investment in renewable energies remained somewhat stable, despite a rapid expansion in renewable use: The declining cost of renewable technologies has offset rising renewable implementation, the report says. And, other than for the use of solar thermal heating installations in China, the investment in renewables for heating rather than power generation has been minor.
Russia and the Middle East The relatively low cost of developing oil resources in Russia and the Middle East, coupled with the impact of currency movements that mitigated the falling price of oil in U.S. dollar terms, supported investment in oil development in these regions in 2015. Exceptionally low drilling costs resulted in the Middle East accounting for just 12 percent of global upstream oil investment, despite the region also accounting for one-third of oil production. In Russia, capital expenditure in ruble terms in the upstream oil industry actually increased, helping to stabilize Russian oil production at a post-Soviet era high, the report says.
In the United States the situation was different, with a 52 percent fall in investment over two years, as low oil prices impacted the debt-financed model of the U.S. shale oil industry. While oil prices directly influence access to bond markets and the cost of capital for U.S. shale oil producers, major oil and gas companies tend to mainly rely on investment from internal cash flows, the report says.
Falling energy costs The report also says that in 2015 there was a fall in the cost per unit of energy produced, with average cost reductions ranging from 3 percent for onshore wind to 30 percent for U.S. shale oil. These cost changes are reshaping the competition between different fuels and energy technologies. Although technology improvements and the effects of “learning-while-doing” dominated the downward cost trend, excess energy supply, especially in the upstream oil and gas sector, also had a significant impact. The report cautions that the reduction in upstream oil and gas costs may not be sustainable if demand picks up again.
Although global energy efficiency investment rose by 6 percent in 2015, despite falling energy prices, low oil prices risk undermining fuel efficiency improvements in the transportation sector, especially in counties with low taxes, the report says. The sales of electric cars and investment in the car recharging infrastructure are increasing rapidly, driven by government policies in a number of countries. The cost of residential lighting has dropped thanks to higher efficiency light bulbs.
Shift to renewables As a consequence of a major shift in investment towards low carbon power generation, the amount of new renewable and nuclear power coming on line in 2015 exceeded the growth in power demand in that year. But high transportation costs and infrastructure bottlenecks are limiting the competitiveness of gas-fired power generation relative to coal in Asia - the LNG infrastructure required to support a gas-fired power plant can cost twice as much as the plant itself, the report says. Furthermore, about 95 percent of power generation investment depends on vertical integration of the supply chain, the use of long-term contracts, or the use of price regulation to manage investment risk, the report says.
Although there is a growing role for the decentralized generation of power from renewable sources, there is a continuing need for investment in the electricity network, especially given the limited medium term outlook for the implementation of large-scale electricity storage.
Energy security The report warns against complacency over energy security at a time of adequate worldwide energy supplies. There are concerns about the energy industry’s ability to ramp up investment rapidly, should need arise; investment in inter-regional LNG supply chains and major pipelines is falling rapidly, mainly because of geopolitical constraints; and the long lead times required for major projects raise questions over whether the energy supply infrastructure will be adequate in the future. In many countries there are questions over whether the regulatory environment can efficiently accommodate changing operational methods in the electricity system, the report says.
The report also comments that the current pattern of energy investment is inconsistent with the transition to a low-carbon energy system, as envisaged in the Paris Climate Agreement of 2015. The achievement of objectives for both energy and climate security will instead require an investment framework aimed at encouraging the rapid, large-scale deployment of low-carbon technologies, the report says.
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