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Oil Investment Crash Could Continue For Another Year

Offshore Oil Rig

Investment in upstream operations in the oil and gas industry shrank by a quarter last year and is expected to continue shrinking this year by another 24 percent. Next year could see a continuation of the trend, which will represent the longest investment decline period in the history of the industry, says the International Energy Agency.

In its latest World Energy Investment report, the IEA points out that most of the decline in upstream investment – a decline of over $300 billion – was a result of lowered costs. This could suggest quickly improving efficiency of exploration and production, but it’s far more likely that the lower costs are a direct result of rigorous cost-cutting by E&Ps across the board to weather the effects of the oil price rout.

In absolute terms, investment in upstream oil and gas totaled $583 billion last year, representing the biggest single portion of investment in energy. Geographically, Russia and the Middle East were the most resilient producing regions, with state-owned companies such as Aramco and Rosneft accounting for 44 percent of the global total in energy investment last year.

On the other hand, 2015 upstream investments in North America were down over 50 percent from 2014, at $138 billion. Overall, however, North America accounted for the most investments in energy last year.

Hardly surprisingly, the share of investments in oil and gas declined in the overall energy investment mix, from 61 percent in 2014, during half of which oil prices were comfortably high, to 55 percent in 2015. This is still an impressive portion, especially in light of the international regulatory and lobbyist drive to tip the scales in favor of renewables. Related: Stormy Seas Ahead For Shippers Following Hanjin’s Bankruptcy

Speaking of renewables, IEA’s report highlights the damage done to this industry by cheap oil and gas. The share of investments in renewables in the overall mix was 17 percent in 2015, up by just one percentage point from the 16 percent it accounted for in 2014.

Still, the IEA notes that wind and solar power has become noticeably cheaper, which has made it possible to expand generating capacity with lower investments. In the period between 2011 and 2015, renewable power capacity was boosted by 40 percent and power production from renewable sources jumped by a third, thanks to cheaper materials and installations, and adoption in countries “with better resources”. Last year, investments in renewables totaled $313 billion.

Back to hydrocarbons, the IEA’s report is bad news for the LNG industry, on which so many hopes are pinned as a cleaner but still hydrocarbon alternative to crude. In 2014 and 2015 investments in LNG peaked, according to the IEA, and this year has already seen a 30 percent drop in spending on LNG terminals. A big part of the decline is the fact that so many large-scale LNG projects came online over the last two years, bringing in a lot of supply, for which there is often not enough demand.

Overall, $1.8 trillion was spent on energy last year, spanning everything from hydrocarbon extraction to energy efficiency to power supply. The reductions in upstream spending were behind the fact that this total was 8 percent lower than the 2014 figure. It was also, partially at least, behind the drop in energy supply investment, which was last year at its lowest since 2010.

By Irina Slav for Oilprice.com

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