Insight Magazine September 2019: The changing faces of energy
Economic warning signals rang out in succession throughout August – from lackluster industrial data in the US, to negative growth in the first quarter in the UK and Germany.
At present, there is little suggestion of an impending economic catastrophe on the scale of the 2008 financial crisis, but analysts are beginning to factor in a higher risk of recession. S&P Global Platts Analytics downgraded its forecast for 2019 oil demand growth to 1.05 million-1.10 million b/d in August, rising to 1.3 million b/d in 2020. However, Platts Analytics has also developed a “Recession Scenario” that sees demand growth slowing to 0.9 million b/d in 2019 and to 0.6 million b/d in 2020. In the absence of a recession, Platts Analytics still points to bullish factors that could help benchmark oil prices recover in late 2020, not least the International Maritime Organization’s switch to lower sulfur fuels from January 1.
Beyond short-term matters of supply, demand and price, there is the thornier question of what lower confidence in the global economy could do to investment – not only in oil but also across the energy mix – and how that could shape the future of our energy consumption.
According to the International Energy Agency’s World Energy Investment 2019 report, investment in upstream oil and gas supply has been relatively stable for the last three years, following a drop between 2014 and 2016. The agency warned that investment in energy supply will need to rise to meet future demand. Spending on low-carbon power generation, in particular, is falling behind that needed to meet climate goals enshrined in the Paris Agreement, it said.
Efforts to transition to low-carbon energy systems could be more vulnerable if governments rein in spending on support schemes, or research and development. Private investment in renewables could suffer too. “Renewables are becoming more and more exposed to merchant risks,” said Bruno Brunetti, global head of power planning at Platts Analytics. “As more developers rely on market revenues, cyclically lower fuel and power prices could undermine projected merchant revenues, discouraging investments.”
The coming year will also test the individual strategies of integrated oil and gas companies, such as Shell and ExxonMobil, respectively first and second in S&P Global Platts Top 250 Energy Company Rankings (see page 91 of the Insight Magazine). In their latest investor presentations, both said they would increase capital expenditures in the coming years, but they diverge in their approach to the energy transition. While Shell is placing a sizable bet on electricity, ExxonMobil is pinning its hopes on fast growth downstream in chemicals, a sector it expects to deliver above-GDP growth for the foreseeable future. There may be space for both approaches to pay off.
In addition to economic pressures, energy companies are facing a workforce crisis precipitated by demographic shifts and changing aspirations among the brightest and most talented young graduates. This realization should help to create overdue improvements in diversity, an issue explored in our special report, #ChangePays in energy (page 32 of the Insight Magazine). Harnessing S&P Global’s essential data, insights and analytics, the report examines progress towards a more inclusive energy sector, and brings together stories from women leaders who are determined to drive deep change in the industry, helping to ensure its resilience to future challenges.