Lack of appetite to invest in the energy sector is leading the world into a supply crunch, says the International Energy Agency (IEA) in its recently unveiled World Energy Investment (WEI) 2020 report.
The COVID-19 pandemic is having widespread and often dramatic effects on investments in the energy sector.
At the start of the year, the report says, “our tracking of company announcements and investment-related policies suggested that worldwide capital expenditures on energy might edge higher by two per cent in 2020.” That would have been the highest uptick in global energy investment since 2014, the IEA reminded.
However, the pandemic has upended these expectations and 2020 is now set for the largest decline in energy investment on record. The report predicts a reduction of one-fifth – or almost US$400 billion – in capital spending compared to 2019.
In its 2018 New Policies Scenario, the IEA projected oil supply to drop by over 45 million barrels per day (bpd), if no capital investments into existing or new fields were made between 2017 and 2025. The report underlined then that even if investments continued into existing fields, with no new fields brought online, the “observed decline” would still lead to a drop of close to 27.5 million bpd over the period.
This meant that even if one assumed global oil demand would fall by 10 million bpd in the post-COVID-19 era, there would still be a supply-demand gap of 17.5 million bpd, writes Alex Kimani in Oilprice.com.
The downward trend in capital expenditures in the industry isn’t only impacting conventional crude oil production. It’s also beginning to sharply lower the U.S. shale oil output.
The U.S. shale industry was slated to bridge about a third of the supply-demand gap. No more, it seems. The sector could see production fall by two million bpd in 2020.
With a huge wave of well shut-ins going on, U.S. shale could permanently lose 10 per cent of production from existing wells even after they’re reopened, Kimani asserts.
Since 2014, according to the IEA, the global annual average level of investments into new conventional crude oil projects has been closer to eight billion barrels, or about half of what’s required to fully meet global demand by 2025. The IEA also estimated that tight U.S. liquids production would need to grow an additional six million bpd by 2025 to meet the resource shortfall.
But the oil price crash of recent weeks has triggered a wave of huge exploration and production capital expenditure cuts. Energy industry researcher Rystad Energy says global capital expenditure is likely to fall by US$100 billion this year to around $450 billion – a 13-year low – while U.S. shale producers are set to similarly lower capital expenditures.
Global capital expenditures in 2019 came in at an estimated $546 billion, well below the $880 billion recorded in 2014 during the last oil price boom. The latest spending cuts have set back the clock a good 13 years, underlines Kimani.
A recent note from Alerian, an independent provider of energy infrastructure and market intelligence, says on an average, capital expenditure has been reduced nearly 30 per cent against initial expectations, and more than 45 per cent versus 2019.
Renewable power projects are also facing the heat and are expected to fall by around 10 per cent for the year, according to the WEI 2020 report. Capacity additions are set to be lower than 2019 as project completions get pushed into 2021.
Final investment decisions for new utility-scale wind and solar projects slowed in the first quarter of 2020 and are now back to 2017 levels.
Distributed solar investments have also been more dramatically hit by lower consumer spending and lockdowns.
Overall, the math for the energy industry is becoming more intriguing and more complicated.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.