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Providing coverage of Alaska and northern Canada's oil and gas industry
July 2018

Vol. 23, No.29 Week of July 22, 2018

Investment points to energy changes

IEA report indicates trend towards higher but shorter-term oil and gas investments, high investment in electricity infrastructure

Alan Bailey

Petroleum News

This year’s report by the International Energy Authority on world energy investment points to some continuing trends in response to changing energy technologies, gyrations in the price of oil and moves towards cleaner energy sources. The report shows that the supply of electricity and the supply and oil and gas continue to dominate the energy investment scene, with electricity investment being a little higher than investment in the oil and gas sector. However, electricity sector investment has declined slightly as a consequence of reduced investment in power generation, and in response to improved energy efficiency. Oil and gas investment has increased somewhat in response to the recent recovery in the oil price.

China remains the largest target for overall energy investment, followed by the United States and Europe.

Oil and gas investment

Investment in the oil and gas sector dropped steadily in 2015 and 2016, as the global oil price plummeted from the giddy heights of the previous few years. In parallel with this investment drop, oil industry costs also fell. With the pickup in the oil price since the end of 2015, investment slowly recovered at a rate of 4 to 5 percent per year. But, with companies managing to keep costs under control, the costs remained almost flat, the IEA says.

Investment levels have not returned to those of 2014, prior to the price crash, as companies continue to pursue a cautious approach to new investment.

Within this overall picture, an examination of investment trends in different upstream oil and gas sectors points to changes in the industry. Currently, oil and gas from conventional fields continues to dominate overall production. And the share of investment in conventional onshore production has been climbing after a sharp fall in 2015. However, the share of investment in shale oil, referred as “tight light oil,” has been climbing steadily, albeit with a dip in 2016 following the oil price drop in 2015. The share of investment in conventional offshore oil and gas has been dropping in the past couple of years.

Short cycle projects

Overall, it appears that investment is moving towards relatively short cycle projects, in particular light tight oil, but also towards “brownfield” conventional oil, oil in established production areas where development risk is relatively low, with more rapid payback than in frontier regions.

Investment in light tight oil has been increasing from about 5 percent of total global upstream oil and gas investment in the last decade to an estimated almost 25 percent this year, the IEA says. There is a tendency for tight oil production to come on line quickly but decline rapidly. This is distinct from traditional investments with long lead times followed by predictable production profiles. The move towards increasing investment in less predictable production raises some concern about future market volatility, the IEA suggests.

Tight oil becoming sustainable

However, data obtained by the IEA relating to the economics of U.S. tight light oil also indicate a trend towards a more sustainable business paradigm for this type of production. As tight oil production climbed in the years leading up to the 2014 drop in the oil price, the cash flow associated with that production became increasingly negative. Essentially, increasing amounts of investment money were being pumped into development without a sufficient counterbalancing revenue flow from the resulting production. When the oil price fell, the cash flow remained negative but the losses were greatly reduced as investment funding dried up and as industry efficiency improved. Since then, while production has gradually increased, the negative cash flow has also continued to decrease, thanks to cost containment and improved efficiency, particularly from the use of new digital technologies. The IEA now predicts that 2018 will see, for the first time, a positive cashflow for the U.S. tight light oil industry, a phenomenon that would represent something of a turning point for the industry.

The IEA suggests that U.S. light tight oil production will continue to increase sharply, potentially rising by a record 1.3 million barrels per day this year. A halving of the breakeven price for the production from more than $90 per barrel when the industry was in its infancy to less than $50 per barrel today underpins this prediction. On the other hand, there are uncertainties in this outlook, including the possibility of cost inflation and the impacts of bottlenecks in transporting oil from the Permian basin to market.

More general trends

Looking at more general energy investment, the IEA says that overall investment declined for the third successive year in 2017. Investment in oil and gas actually increased by 2 percent last year, but that increase was counterbalanced by a 5 percent drop in investment in the electricity sector. However, investment in electricity remained a little higher than that in oil and gas, a phenomenon that the IEA attributes to the long-term electrification of the energy system - traditionally oil and gas have dominated the energy investment landscape.

The fastest growing energy sector in 2017 was energy efficiency, but with investment levels less than a third of those in either electricity or oil and gas. However, the combination of energy efficiency and renewable energy, two cornerstones of a clean energy transition, showed an overall investment drop of 3 percent after two years of increase. Investment in coal was low and demonstrated a continuing decline. And, following a lack of adequate government policy support, investment in renewable energy for transportation and for heat generation declined in 2017, the IEA found.

Overall, in 2017 fossil fuels’ share of energy investment grew somewhat, following a fall over the previous few years.

The electrical power sector

The nature of investment in the electrical power sector has continued to evolve in recent years, with the share of renewable energy and electricity networks in total investment tending to increase, while the share of investment in fossil fuel generation - coal, oil and gas - decreased. Improving energy efficiency has been dampening electricity demand growth. However, global electricity demand appears to be growing more quickly than investment in low carbon power sources. In particular, new investment in hydro and nuclear power has been slackening by more than investment in wind and power generation has been increasing.

Renewable power generation investment in the past few years has trended towards support for larger scale projects that can achieve economies of scale. However, this trend is not as prevalent in Europe, given factors such as land constraints in that region, although Europe has been pioneering the development of large offshore wind systems.

From the perspective of thermal power generation, including coal and gas-fired plants, there has been a significant drop in decisions to build new power plants. This has particularly been observed in China, India and Southeast Asia and appears to have resulted from difficulty in financing new plant.

Government involvement

In general, governments around the world have been playing a somewhat increasing role in energy investment in the past five years. Government investment is particularly prevalent in electricity networks and storage, and is also quite strong in thermal power generation, coal, and oil and gas. Private investment tends to be more dominant in renewable energy and energy efficiency.

Government policies and regulation impact energy investment in both the private and public sectors. For example, more than 95 percent of power sector investment in 2017 depended on regulated pricing or on policy mechanisms for addressing long-term pricing risk, the IEA found.

Public spending on research and development for clean energy technologies rose by 13 percent in 2017, particularly in China and the United States, after a few years of stagnation. The private sector has also increased its spend on energy research, the IEA has found. Investments in energy technology startups has particularly grown in the area of information and computer technology.

However, there needs to be more investment in carbon capture, usage and storage, a vital component of efforts to address climate change, the IEA says.






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