Oil and Gas Spending Continues to Drop
Global energy investment fell by 12 percent in 2016, the second consecutive year of decline, as increased spending on energy efficiency and electricity networks was more than offset by a continued drop in upstream oil and gas spending, according to the International Energy Agency's annual World Energy Investment report.
Global energy investment amounted to $1.7 trillion in 2016, or 2.2 percent of global GDP. For the first time, spending on the electricity sector around the world exceeded the combined spending on oil, gas and coal supply. The share of clean-energy spending reached 43 percent of total supply investment, a record high.
China, the world's largest energy investor, saw a 25 percent decline in coal-fired power investment last year and is increasingly driven by clean electricity generation and networks, as well as energy efficiency investment.
The U.S. saw a sharp decline in oil and gas investment and accounted for 16 percent of global spending. India was the fastest-growing major energy investment market, with spending up seven percent thanks to a strong government push to modernize and expand the power sector.
After two years of unprecedented decline, global upstream oil and gas investment is expected to stabilize in 2017. However, an upswing in U.S. shale spending contrasts with stagnation in the rest of the world, signaling a two-speed oil market. At the same time, the oil and gas industry overall is transforming itself by delivering large cost savings and focusing more on technology development and efficient project execution.
The IEA report also found that while carbon emissions stagnated in 2016 for the third year, investment in clean electricity generation was not keeping pace with demand growth. Growth in new wind and solar PV generation growth is almost entirely offset by a slowdown in final investment decisions for new nuclear and hydropower expected in the coming years.
Meanwhile, according to a recent Wood Mackenzie report "A big year for FIDs: 2017 marks a turning point," the number of upstream oil and gas projects reaching final investment decision (FID) in 2017 could double to 25 compared to only 12 last year.
In the first half of the year, the industry has already witnessed 15 project sanctions which equates to about eight billion barrels of oil equivalent (bnboe) of reserves, mostly in brownfield projects. This is almost comparable to project sanctions in the whole of 2016 , which saw 12 FIDs and 8.8 bnboe of reserves approved.
"These are positive signs that the upstream industry is continuing on the road to recovery and that the more competitive conventional projects are moving down the cost curve sufficiently to attract new investment," says Angus Rodger, research director, Asia-Pacific upstream.
"11 of the 15 project sanctions year-to-date are either brownfield expansions on existing fields, satellite developments or subsea tiebacks. Not only are these projects less risky than greenfield developments, they also tend to be less capital-intensive and are quicker to bring onstream, offering a quicker payback and better returns on development dollars," says Rodger.
"This is reflected in lower development capex per barrel and stronger project returns. For example, on average, project capex is down to $11/boe versus $15/boe in 2015," says Rodger.
Another clear trend is that the majors dominate the FIDs scene. Eight of 15 project sanctions in 2017 are operated by the majors. Of the 35 mid-to-large projects sanctioned since the start of 2015, 19 were major-operated. This equals just under 14 bnboe of the 22 bnboe total of commercial reserves sanctioned.
Wood Mackenzie estimates that these projects would make up 1.6 million boe/d of net new production to the majors by 2024, which is around six percent of total output from the peer group.
Conversely, national oil companies (NOCs) have tightened their purse strings and have been noticeably inactive on new project investments over the 2015 – H1 2017 period. Operating less than one bnboe of the 22 bnboe total of sanctioned commercial reserves, NOCs need to be on the lookout for investment opportunities as many face significant production declines post-2020.
"The second half of 2017 could see another 11 bnboe of reserves hit FID, and again we expect strong activity from the majors. However, it is also important to note that last month ExxonMobil sanctioned the first phase of development on the 1.5 bnboe Liza oil field. This goes to show that it is not just about short-cycle investments; the best greenfield opportunities are also moving forward to commercialization," says Rodger.