This week the International Energy Agency (IEA) released their annual World Energy Investment report (WEI), revealing that in 2016 energy investment plummeted by a staggering 12% from the previous year. In 2015, investors poured $1.9 trillion into the energy market, but in the past year investment dropped to a total of just over $1.7 trillion, a concerning prospect as global populations continue to boom, middle classes continue to expand at breakneck paces in places like India and China, and energy demand grows steadily around the world.
Most concerning is the bottoming out of upstream investment, which has plunged a staggering 44% between 2014 and 2016. The IEA is hopeful, however, about a modest rebound in 2017 after this year’s stunning 53% increase in US shale investment and healthy spending in heavy-hitting production regions like the Middle East, Russia, and Mexico. The agency predicts that thanks to this new cash flow, upstream investment will bounce back by 3% before the end of the year.
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Shale oil and gas have exploded in the United States this year, with an extraordinary uptick in production and upstream investment, contrary to global trends. Russia is also going strong as it continues to power the rest of Europe with its massive supplies of oil and natural gas, but it’s looking like their monopoly is finally due for some competition as the U.S. rolls out its first shipments of liquefied natural gas to Europe this summer, with deliveries already being made to Poland and the U.K.
China, meanwhile, towers above all others as the top country for energy investments with a stunning 21% of the global total. However, this money is not headed upstream. The largely coal-dependent nation is changing their directions, with a 25% decline in new coal-fired plants this year and an increasing interest in low-carbon electricity supply and energy efficiency. The middle east, if they put their money where their mouth is, will also be veering away from upstream investments as Mohammad bin Salman, architect of Saudi Arabia’s ambitious diversification plan “Vision 2030,” has been moved up as the successor to the throne and continues to flex his grand, if a bit idealistic, ideas for a vastly different future for the gulf states.
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The Saudis may just have the right idea. Although the Majors have done their best to win back upstream and long-term investments, with last quarter’s pared back costs and higher prices, boosting margins, they haven’t been able to convince without a coherent long-term plan to deal with the looming threat of peak oil demand.
While the majors insist that oil is here to stay, investors know that actions speak louder than words, and Big Oil’s growing investment in renewables is certainly not encouraging for investors looking for aggressive strategies to ensure the continued profitability of Big Oil and returns on long-term projects. France-based oil giant Total, one of the more salient examples of this trend, spent $4.7bn on renewables in 2016 and employs over 13,000 people in its gas and renewable power division.
Investors have become more and more risk-averse in the unsteady markets, historically low oil prices, and oil and gas production gluts of the last few years. There is now an increased interest in investments with quick returns and a shying away from long-term upstream investments. According to the WEI, “the global cost curve has rebased, and the significant component of cost reduction experienced over the last two years is likely to persist in the foreseeable future,” leaving us to wonder: is an energy crisis looming as upstream investment fails to recuperate?
The EIA has said that the overall 18% decline in global energy investment since 2014 points to a potential crisis in the coming years leading to “market tightness and undercapacity.” This is in large part due to the current glut that’s driving down prices and scaring away investors. Another factor is the recent decrease in the sanctioning of conventional oil fields, which is currently at its lowest level in over 70 years.
Thanks to the exhaustion of existing oil fields and the sheer drop-off in upstream investment, there is a dire need for more spending in conventional oil fields or we will certainly be facing a supply squeeze in the not-too-distant future. But for now, the money is not forthcoming.
In fact, this year, for the first time in history, the energy sector beat out oil and gas as the year’s largest recipient of energy investments. Energy spending increased by 7% in India alone as the subcontinent pushes mightily for modernity. Oil and gas still comprises two-fifths of global energy supply investment, but capital spending has dropped 38% in the last 2 years.
Peak oil demand, while a real threat, is still a few decades out, so why are investors are sitting on their cash like it’s due any day now? As the rest of the world decreases production, now could actually be the perfect time for upstream investment. Today’s gas glut will quickly transition into a squeeze if investors don’t loosen their purse strings and follow the U.S.’s lead.