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IEA reports drop in energy investment Says increase in energy efficiency and electric network investment in 2016 more than offset by cutback in oil and gas sector Alan Bailey Petroleum News
Total worldwide energy investment of just over $1.7 trillion in 2016 was 12 percent less than investment in 2015, according to the International Energy Agency’s recently released World Energy Investment 2017 report. The drop in investment primarily resulted from a fall of more than 25 percent in spending on the upstream oil and gas industry, although investment in electrical power generation also fell by 5 percent. These falls were somewhat offset by an increase of 9 percent in energy efficiency investment and 6 percent in spending on electricity networks, the report says.
Drops in unit costs in upstream oil and gas and in solar photovoltaic technology were major factors in the overall fall in spending levels, although reduced oil and gas drilling and a drop in the capacity for fuel-based power generation also contributed to the overall investment trend, the IEA report says.
Need for oil investment The report cautions that, given the depletion of existing oil fields, there needs to be an increased pace in investment in conventional fields to avoid a future oil supply squeeze. Although an energy transition has begun, with energy technologies changing and with climate policies impacting oil demand, that transition has barely begun in several key energy sectors such as transportation and industry - these sectors will continue to rely heavily on oil, gas and coal for the foreseeable future, the report says.
However, although investment in upstream oil and gas plunged by 44 percent between 2014 and 2016, there are indications of a modest rebound in 2017 - there has been a 53 percent upswing in investment in U.S. shale oil investment and resilient spending in major producing areas such as the Middle East and Russia.
But the oil and gas industry is making a major transformation to the way it operates, with an increasing focus on shortening the payback period for investments and the simplification and streamlining of projects. As a consequence the oil supply cost curve has changed - much of the cost reduction observed in the last two years is likely to persist for the foreseeable future, the report says.
During the downturn in oil prices, oil and gas companies increased their leverage significantly, with independent U.S. oil companies seeing their debt costs soar. However, a rebound in oil prices since early 2016 has reduced the cost of bond financing, companies have improved their financial health through efficiency gains, and large oil companies have taken an interest in purchasing shale oil assets from the independents, the report says.
Investment in renewables Globally, investment in new renewables-based generation capacity remained the largest area of spending in the electricity supply sector, although investment fell back a bit in 2016 because of declining unit costs and because of technology improvements in wind and solar power. Overall spending in the electricity sector dropped a little, with an increase in spending on electricity networks somewhat offsetting a reduction in spending on power generation.
Investment in coal-fired power plants fell sharply in 2016, amid concerns about air pollution and about overcapacity, especially in China. However, investment in coal-fired generation remained high in India.
An abundance of low-cost natural gas led to strong investment in gas-fired power generation, in particular in North America, the Middle East and North Africa. In Europe the retirement of old gas-fired plants exceeded the amount of new capacity that was given the go-ahead for construction, the report says.
Electricity networks In 2016 a continuing rise in investment in electricity networks in various parts of the world, including China, India, Southeast Asia, the United States and Europe, reflected a drive to modernize the electricity grid, moving from the simple distribution of energy to a more integrated platform which includes data and services and which reflects the evolution of digital information and communications technologies. Investment in grid-scale, battery-based energy storage is also rising quickly and reached a level of more than $1 billion in 2016, the report says.
Investment in energy efficiency has continued to grow, particularly in the building sector. The fastest growth in efficiency in 2016 happened in China, where a strengthening of energy efficiency policies is helping to reduce the energy intensity of the economy.
The numbers of heat pumps and electric vehicles sold grew by 28 percent and 38 percent respectively in 2016: These technologies can improve energy efficiency and, in conjunction with renewable energy, can help decarbonize space heating and mobility. However, their impact on oil and gas demand has so far been small, the report says.
And, while the energy performance of equipment used in developing countries is improving, there is still much room for further advancement. For example, new air conditioners sold in 2016 have added significantly to global electricity demand but could use 40 percent less power had they been manufactured to the highest efficiency standards, the report says.
Importance of government policies Government policies have a major impact on the electricity industry, with 94 percent of global power generation being subject to some form of government regulation in 2016. Almost all electricity network investment happened in regulated markets. However, significant changes are taking place in some sectors - in 2016 nearly 40 percent of utility-scale renewable investment happened in markets with competitive mechanisms, including auctions for power purchase and contracts with corporate power buyers.
In 2016 governments and state-owned enterprises accounted for 42 percent of total investment in energy worldwide. However, 90 percent of the investment originated from investors requiring earnings from their investments, thus underlining the importance of sustainable industry earnings, the report says. An increasing role for state-owned enterprises, especially in China, in electricity investment has nudged up the share of state entities in energy investment in recent years. And in the oil and gas industry national oil companies have being playing an expanded role in upstream oil and gas spending, accounting for 44 percent of the total spend in 2016. Governments accounted for 14 percent of energy efficiency spending, much in the form of loans and other mechanisms that generate private spending, the report says.
Investment league table China saw the biggest overall investment in energy in 2016, followed by the United States and Europe. Energy investment in China, at 21 percent of the global total, saw a 25 percent decline in the commissioning of coal-fired power plants coupled with a movement towards investment in low-carbon electricity supplies and in electricity networks. Despite a sharp decline in oil and gas investment in the United States, investment in renewables pushed the U.S. share of global energy investment up a bit. India, the country that came in fourth in the energy investment rankings, saw a jump of 7 percent in its energy investment level in 2016, primarily as a result of a government push to modernize the country’s power infrastructure and to improve people’s access to electricity supplies, the report says.
In general, technological progress is driving down the labor intensity of all aspects of the energy system, with, for example, a 30 percent drop in U.S. upstream oil and gas jobs since 2014, despite only a marginal drop in production. However, the impact on employment varies greatly between different regions, depending on the regional distribution of different energy technologies.
Digital technology has become increasingly important in energy production and distribution - in 2016 $47 billion was spent on the digitization of the electricity sector, to enable more flexible network operations, demand management and the integration of renewable resources. The oil and gas industry has been scaling up its use of digital technology for improved efficiency.
Research investment flat Despite a recognition of the need for energy innovation, spending on energy research and development has remained fairly flat in the past few years. Most private research spending is directed at oil, gas and thermal power, while public research spending goes more towards clean energy technologies, the report says.
Some important carbon capture and storage projects, mostly financed by companies, are now starting operation. But, with current policies not supporting an uptick in spending in this arena, there is a lack of new projects entering construction, the report says.
And new policies are needed to drive investment aimed at increasing electricity supply flexibility, to support the integration of more wind and solar power into the electrical system and hence bolster energy security, the report suggests.
Improved energy efficiency, coal-to-gas switching and the cumulative impact of new low-carbon power generation have all contributed to the stagnation of carbon dioxide emissions in the past three years. However, the level of low-carbon power generation from wind and solar is being almost entirely offset by declines in investment in nuclear power and hydropower. With investment in new low-carbon generation needing to keep pace with electricity demand growth, there is considerable scope for increased investment by governments and the private sector in clean energy innovation, the report says.
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