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Energy Industry in 2016
We entered 2016 in a state of uncertainty and some might have even started out this year waiting for the other shoe to drop – and it did.
West Texas Intermediate fell to $26 per barrel in February 2016, leading to a survival mindset from many industry players and continued reductions in CAPEX as well as headcount.
In April, reserve base loan redeterminations yielded dramatic declines in borrowing bases and a rash of bankruptcies and debt restructurings.
The US natural gas sector continued to be resilient in 2016 with US Lower 48 production declining by only just over 1 billion cubic feet per day, despite continued low prices; with the historic emergence of the US as an LNG exporter; and the equally historic rise of natural gas as a power generation fuel, overtaking coal as the leading source of electric generation for the first time on an annual basis.
Oilfield services continued to have a difficult year as upstream capital spending remained under extreme pressure. Several large-scale consolidations were announced in this challenging business environment and layoffs continued.
The midstream segment largely stayed in a holding pattern in 2016 as upstream retrenchment reduced the need for new pipeline investment
In the downstream sector, refiners went into 2016 concerned about the potential impact on their business of newly authorized crude oil exports, both on throughputs and margins. Thus far these concerns have, to a large extent, proved unfounded, with an increase in domestic demand and exports offsetting weaker crack spreads. Refined products exports have continued to rise alongside the upturn in crude oil exports associated with the opening of new markets. Overall, while not as strong as 2015, 2016 still looks to be a fairly good year for downstream.
As we approach the end of this year, a sense of cautious optimism has crept into the industry. We saw the beginning of an increase in M&A and acquisitions and divestitures activity, OPEC finally announcing production cuts of 1.2 million barrels per day in 2017,5and rig counts growing, albeit slowly, once again.
The overall mentality of survival prominent in 2016 has resulted shift towards shorter-cycle projects. $620 billion of projects through 2020 are estimated to have been deferred or canceled as a result of the downturn. The demand for long-term, complex major capital projects has lessened, except for a few omissions. Although this shift is not surprising to most, given the downturn of the industry over the last few years, the growth of short-cycle unconventional projects makes for a different investing landscape than in previous cycles.
Traditional concerns related to oil and gas are reinforced by record falls in investment levels.
In the longer-term view, investment in oil and gas still remains essential to meet demand and replace declining production, but the growth in renewables and energy efficiency lessens the call on oil and gas imports in many countries.
Coal consumption is estimated to barely grow over the next 25 years, as demand in China starts to fall back thanks to efforts to fight air pollution and diversify the fuel mix. The gas markets are also changing leaving renewable energy benefiting from the shift in project structures and the downturn of the carbon-based energy industry throughout the near future.
Global investment in renewables rose to 285.9 billion USD in 2015, taking it above the previous record of 278.5 billion USD reached in 2011. Even more impressive than the dollar investment record set in 2015 was the result in terms of gigawatts of capacity installed. In 2015, some 134GW of renewables (excl. large hydro projects) were commissioned, equivalent to some 53.6% of all power generation capacity completed in that year. Of the renewables total, wind accounted for 62GW installed, and solar photovoltaics for 56GW.
It is estimated that natural gas and especially wind and solar are set to replace the champion of the previous 25 years: coal. But government policies will have a big part in determining where the energy goes from here.
The renewable energy sector is developing strongly, but gains remain largely restricted to electricity generation. The next step for the sector will be to expand in the direction of the industrial, building, and transportation sectors which bear big amount of potential for growth.
Judith Gruendler, 15. December 2016, 10:46