2019 Global Outlook: Market forces move developments in energy

Various fuels’ shares of the total global energy mix
Though the share of oil is dropping, and renewables are increasing, the world’s energy mix will likely remain dominated by fossil fuels for decades to come (source: macpixxel for GIS)

As the new year starts, it is worth reflecting on the significant energy events that shaped 2018 and how they could influence trends in 2019. Though there was no shortage of attention-grabbing developments last year, many were country-specific, while others will only have a short-term effect.

Looking back at 2018, the energy source that garnered the most international attention was oil, with its transforming market forces, intensifying competition for market share and capital, and impact on global affairs, to say nothing of the attempts at predicting prices. These factors will continue to capture attention in the new year. Other sources of energy will also evolve, albeit at a different pace.

Greening energy

Energy transitions can take several decades to fully blossom. It takes time to adjust infrastructure, habits, policies and regulations, while the prices of different energy sources need to be right to encourage switching from one fuel to another.

The march toward greener energy sources continues. Efficiency gains have been maintained and renewable energy has entered a “virtuous cycle of falling costs, increasing deployment and accelerated technological progress,” according to the Abu Dhabi-based International Renewable Energy Agency (IRENA). However, the impact on global energy consumption remains small and this is unlikely to change anytime soon.

Many fuels that compete with renewables achieve equally or more impressive efficiency and productivity gains

Investment in renewable energy, particularly power generation, will continue to race ahead, supported by friendly policies and government backing. Nonetheless, costs, storage and infrastructure remain key for renewable energy to expand its reach, especially when competing fuels are achieving equally or more impressive gains in efficiency and productivity.

For example, according to the Energy Information Administration (EIA), hydrocarbons production (both total and per new well) have increased in the western Texas Permian basin for 11 consecutive years – and no end is in sight. Oil and gas companies continue to invest in breakthrough technologies that improve not only operational efficiency, but also reduce environmental impact.

Nuclear energy is still in a challenging spot. It is regaining trust in traditionally big consumers like Japan, which has decided to gradually turn some of its nuclear reactors back on, seven years after the Fukushima disaster. Elsewhere, however, it has experienced setbacks. The UK’s National Infrastructure Commission (NIC), in its first-ever assessment, published in 2018, cautioned the government against “a rush to agree government support for multiple new nuclear power stations.” The enormous price tag that comes with building and managing a nuclear power plant is still prohibitive, especially when there are cheaper, safer and more easily accessible alternatives.

A nuclear power plant in Germany
Nuclear power faces many challenges to gaining traction. Germany, the site of the above power plant, has pledged to phase out the technology by 2022 (source: dpa)

Nuclear energy has a long way to go to make a significant dent in the global energy market. Its share in the primary energy mix has declined since reaching a peak of 18 percent in 1996. However, exporting nuclear technology remains attractive for several countries, like Russia and some in Asia. The gains are not confined to nuclear projects alone, but also apply to related areas, such as infrastructure and security.

A new lifeline for coal?

When coal demand dropped for two consecutive years in 2015 and 2016, some rushed to hail the demise of the world’s largest contributor to power generation. That reaction soon appeared premature, as coal demand leveled off in 2017, then increased in 2018. The love affair with coal, the fuel that once drove the Industrial Revolution, continues in the developing world, which will be leading the growth in energy demand. After all, coal is cheap and widely available, making it irresistible for many growing economies.

The dent in coal consumption will be more noticeable if the largest consumers, mainly China and India, adopt strict policies to curb its growth. That would entail encouraging the use of alternatives such as natural gas, as well as renewable and nuclear energy. Here too, there is still a long way to go. In China, for instance, coal accounts for more than 60 percent of the country’s primary energy mix, compared to less than 12 percent for renewable energy (including 8 percent from hydropower), 7 percent for natural gas, and 2 percent for nuclear.

In the U.S., low-cost natural gas has been crowding out coal in power generation

It remains unclear whether the decline in coal consumption, particularly in the developed world, will offset increases elsewhere, as happened between 2015 and 2016. This will depend on the prices of other fuels, as well as the fate of climate policies. In the United States, low-cost natural gas has been crowding out coal in power generation thanks to a plentiful supply of shale gas. According to the EIA, U.S. coal consumption in 2018 was at its lowest level in 39 years, despite President Donald Trump’s pledges to revive the country’s coal industry. Market forces have proven more potent.

Gas competition

There were no significant surprises in natural gas markets in 2018. The adequate supplies and relaxed market atmosphere are expected to continue throughout 2019, though regional markets will vary. One crucial, difficult-to-predict factor will be the weather, given the seasonality of gas demand.

In the global liquefied natural gas (LNG) market too, the U.S. shale revolution has had a major impact. Even pipeline gas, despite its regional nature – with its varying regulations and pricing mechanisms – felt the repercussions.

When the first cargo of American LNG left the U.S. coast in February 2016, it distorted the market order. Initially, the U.S. was poised to be a major importer of LNG, but with its new gas wealth, facilities built for imports were converted into export terminals, marking the arrival of a serious challenger to conventional exporters. The EIA expects U.S. LNG export capacity to more than double by the end of 2019, making it the third-largest LNG exporter in the world behind Australia and Qatar.

Key global energy facts

  • China, India and the U.S. will account for two-thirds of global renewable capacity growth to 2022 (World Economic Forum)
  • About 50 power reactors are currently being constructed in 15 countries, notably China, India, Russia and the United Arab Emirates (World Nuclear Association)
  • In 2018, Toshiba scrapped its plan to build a nuclear power plant in the UK, stating “After considering the additional costs entailed in continuing to operate NuGen, Toshiba recognizes that the economically rational decision is to withdraw from the UK nuclear power plant construction project”
  • Coal will provide 25 percent of the world’s energy by 2023, down from 27 percent in 2017 (IEA, 2018)
  • Around 65 percent of the gas produced is traded via pipeline; the rest through LNG
  • In addition to the existing 150 billion cubic meters (bcm) of spare capacity in the EU, the EU is supporting 14 LNG infrastructure projects, which will increase capacity by another 15 bcm by 2021 (EU Commission, 2018)
  • The eight countries that received waivers from the U.S. to import Iranian oil are: China, India, South Korea, Japan, Italy, Greece, Taiwan and Turkey
  • In December 2018, Qatari Energy Minister Saad Sherida al-Kaabi said his country’s decision to withdraw from OPEC “reflects Qatar’s desire to focus its efforts on plans to develop and increase its natural gas production.”

The European Union has been an attractive destination for U.S. exports because of its well-established LNG receiving infrastructure, growing market and location. There is also an important political dimension, as the EU continues to seek ways to weaken Russia’s grip on its gas market. In July 2018, President Trump and European Commission President Jean-Claude Juncker agreed to strengthen EU-U.S. strategic cooperation concerning energy, including greater LNG imports from the U.S. to enhance Europe’s energy supply security. Both sides are likely to pursue this goal, subject to price competitiveness, of course.

Even despite such efforts, in 2018 Russian gas exports to Europe increased, as the Russians tempted customers with lower prices. The question is whether their strategy is sustainable.

King oil

Oil was the fuel that captured most media attention in 2018. Following their collapse in the summer of 2014, oil prices traded in a lower band compared to what prevailed between 2011 and 2014. To reverse the decline, in December 2016, OPEC assembled the biggest alliance in the history of the oil industry and agreed on coordinated production cuts with non-OPEC producers, led by Russia. The partnership became known as OPEC+.

OPEC+ succeeded in putting a floor under prices, but the development of tight oil in North America provided a ceiling. Unlike traditional conventional oil, tight oil responds fast to changes in oil prices, limiting the influence of traditional powers like OPEC over the market. A conventional oil project might take seven to 10 years to convert an investment into production. For tight oil projects, however, the time frame has now shrunk to months, making it more sensitive to price fluctuations. Furthermore, thanks to the shale revolution, the U.S. has surpassed Russia and Saudi Arabia to become the world’s largest crude oil producer; competition for global market share has intensified since.

The OPEC+ alliance has held together for longer than many expected, as it attempts to ‘rebalance’ the market

The challenge of not only plentiful but more flexible oil supplies has been so big that the OPEC+ alliance has held together for longer than many expected, as it continues to attempt to “rebalance” the market at a higher oil price than what the system would have generated by itself.

Oil prices experienced daily volatility because of geopolitical developments, especially in the Middle East. Because of the factors mentioned above, though, they remained in a well-defined corridor, averaging between $60-80 per barrel, despite endless warnings of some shortsighted analysts, constantly swinging between predicting “lower forever” to triple-digit prices.

OPEC’s challenges

The first half of 2018 saw oil prices rise for two main reasons. The first was faster-than-expected production declines in destabilized countries such as Venezuela. The second was the U.S. government’s decision in May 2018 to withdraw from the Joint Comprehensive Plan of Action (JCPOA, also known as the Iran nuclear deal), and reinstate sanctions on Iran (including those targeting its oil sector) last November. This put the market in a nervous state and led OPEC+ to announce an increase in production at its June meeting in Vienna. Many feared that such increases were not enough and warned that oil prices were entering “the red zone,” as the International Energy Agency (IEA) put it.

However, November came, and the U.S. revealed it would grant waivers to eight major importers of Iranian oil for six months, after which the exemptions would be reviewed. This move, combined with anxious feelings about a “trade war” between the world’s largest economies and biggest oil consumers – the U.S. and China – helped push prices down. As a result, OPEC+ made a U-turn and announced production cuts in December last year, effective as of January 2019. The alliance is likely to continue chasing prices this year.

OPEC+ will remain on the scene as long as its two architects – Saudi Arabia and Russia – are in agreement.

OPEC+ will remain on the scene as long as its two architects – Saudi Arabia and Russia – are in agreement. It does, however, face challenges on various fronts. After overcoming some infrastructure bottlenecks in 2018, tight oil is expected to regain its growth momentum this year. Moreover, the alliance faces internal difficulties. Qatar decided to leave OPEC after a membership that lasted nearly six decades. Other smaller producers are increasingly frustrated with Saudi Arabia and Russia controlling the organization’s strategy.

Then there is the No Oil Producing and Exporting Cartels (NOPEC) bill which was introduced last year in the U.S. If passed, it would allow the U.S. attorney general to sue OPEC for price manipulation under the Sherman Antitrust Act. To pass, however, the bill requires the endorsement of the president. Although President Trump has been openly critical of OPEC, he seems to be getting what he is demanding via his tweets, using geopolitical developments to put pressure on key members within the group. This situation is unlikely to change in 2019.

Overall, 2018 was far from boring on the energy front. The main takeaway is that, in energy as in other sectors, market forces remain more decisive than political rhetoric.

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