Global energy investment declined for the third consecutive year in 2017 to $1.8 trillion, a shortfall of 2% in real terms from the previous year, according to the recently released World Energy Investment 2018 report from the International Energy Agency.
The electric power generation industry accounted for most of this decline in 2017, due to fewer additions of coal, hydro, and nuclear power capacity, which more than offset increased investment in solar photovoltaics (PV).
The electricity power industry was the largest recipient of global energy investment for the second year running, supported by robust investment in networks and renewable power. In 2017, more than $750 billion went to the electricity sector while $715 billion was spent on oil and gas supply globally.
Upstream oil and gas investment increased in 2017. Nevertheless, capital spending on fossil fuel supply remained around two thirds of that for 2014.
Investment in fossil fuel supply stabilized at about $790 billion in 2017 as reduced spending in coal supply and in LNG offset a modest rise in upstream oil and gas.
Oil and gas investment
The oil and gas industry is shifting towards short-cycle projects and rapidly declining producing assets while expanding into the downstream sector and petrochemicals.
Upstream oil and gas investment rose 4% to $450 billion in 2017 and is set to rise 5% to $472 billion in 2018, driven by US shale, which is expected to increase by 20%.
Investment in conventional oil and gas remains subdued, focusing on brownfield projects, and the share of greenfield projects in total upstream investment is expected to plunge to about one-third in 2018—the lowest level for several years.
While the recovery in upstream investment is not homogeneous, most companies continue to prioritize cost control, financial discipline, and returns to shareholders. They appear to be aiming to reduce exposure to long-term risks, expanding their activities in smaller projects that generate faster payback, such as shale and brownfields. Global investment in shale is expected to reach a record of almost one quarter of total upstream spending in 2018.
At the same time, oil and gas companies are increasing their investments outside the upstream sector. Global investment in refining increased 10% in 2017. Investment in petrochemicals rose 11% to $17 billion in 2017 and is set to reach nearly $20 billion in 2018. For the first time in recent decades, the US was the largest recipient of investment in petrochemicals.
Investment in LNG liquefaction plants continues to plunge and is expected to fall to about $15 billion 2018, as only three new LNG projects have been sanctioned since mid-2016.
US shale financing
Higher prices and operational improvements are putting US shale on track to achieve positive free cash flow in 2018 for the first time ever. Risks to the financial health of the sector remain, including inflationary pressures and pipeline bottlenecks in the Permian basin.
Since 2010, US shale has consistently spent more than it has earned, generating cumulative negative free cash flow of about $250 billion. This has forced it to rely largely on external source of financing. Following a very turbulent 2015-16 period, the sector appears to be benefiting from huge technological and operational advances, as well as higher prices and a more cautious approach to investment.
Growing investments by the majors in US shale, tripling in just 2 years to 18% of their 2018 planned upstream oil spending, could boost prospects thanks to economies of scale and technical improvements, including the increased use of digital technologies. Although in decline, the leverage of US shale companies remains high, but the average interest rate paid to service their debt, at about 6%, has been broadly stable as capital markets reward the improvement in sector’s financial health.
The rollercoaster journey of oil prices in recent years has not fundamentally changed the way the oil and gas industry finances operations. The industry generally is now on more solid financial footing, thanks to higher oil prices, continuing financial discipline, and cost reductions. In this year’s first quarter, majors achieved the highest level of free cash flow since the same period in 2012 and are starting to reduce leverage, which skyrocketed during 2014-17. The largest 20 institutional equity holders in the oil and gas majors are continuing to expand their stakes, which in aggregate rose from 24% in 2014 to 27% in 2017, encouraged by high and stable dividends.
