What changed energy markets in the 2010s?
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Can a decade be a turning point? So much happened in the energy sector, the 2010s might be seen as just that. Our analyst team identifies five major themes and trends.
1. US energy resurgence
Commercial exploitation of US tight oil changed energy markets and upstream strategies. The technology breakthrough may have come the prior decade, but fracking tight oil came of age in the 2010s. Cheap money poured into half a dozen plays, rejuvenating a moribund domestic sector. American IOCs focused on international business development pivoted back home in search of lower risk growth. US liquids production increased by 10 million b/d from 2010, mostly in tight oil, reaching a record 18 million b/d by end-2019. The US lifted its crude export ban in 2015.
New US volumes added 10% to global oil supply, undermining price and crude price differentials. OPEC ultimately was forced to shift strategy, embracing non-OPEC producers, notably Russia, to cut production and protect price. Some OPEC economies need in excess of US$80/bbl Brent to balance budgets.
Shale gas and, latterly, huge volumes of low-cost Permian gas drove the Henry Hub price down. Gas squeezed coal out of the power mix and spawned multiple US LNG export projects, which are starting to disrupt the global LNG market. Rising ethane production sparked a renaissance in US petrochemicals.
2. Intensifying geopolitical tension
Emboldened by the prospect of energy self-sufficiency, the US flexed its muscles across a wide range of foreign policy issues affecting energy markets – especially after the 2016 election. First, in 2014, the US (with the EU) imposed sanctions on Russia following the invasion of Crimea. Second, in 2017, President Trump announced the US exit from the Paris Agreement of 2015, spurning the global climate change deal that needs both multi-lateral co-operation and leadership from the world’s biggest economy to succeed. Third, the US trade dispute with China beginning in 2018 led to slower global economic growth and energy demand. Fourth, that same year, the US pulled out of the Iran nuclear agreement.
Global liquids supply outages – a blunt measure of geopolitical tension – rose exponentially from under 1 million b/d in 2010 to over 5 million b/d by 2019, 5% of demand. Some 2 million b/d is directly due to US export sanctions on Iran and Venezuela imposed in the last three years.
3. The last cost cycle
Upstream costs blew out early in the decade. With oil prices rising but service sector capacity tightening, the industry lost discipline as it strove to develop a clutch of mega-projects. All that changed in 2014. Brent plunged, and the industry had to recalibrate for lower-for-longer prices to survive.
Majors turned to downstream for answers – to a refining management experienced in 'managing for margin’ after a lengthy down-cycle. The strategy was back-to-basics: cutting costs and tightening capital discipline; releasing capital from non-core assets and concentrating portfolios around advantaged positions; re-engineering future projects to reduce costs; and executing projects faster to bring forward cash generation. Upstream E&P spend today is 40% below the 2014 peak but with spare capacity in the service sector there’s more bang for buck. Corporate cash flow breakevens in 2020 should average US$55/bbl (Brent), down from US$95/bbl in 2014. The 2010s may have seen the last global cost squeeze; as we enter the 2020s, the outlook for oil and gas supply is plentiful while the risks to longer term demand from the energy transition are growing.
4. An awakening to climate change
Zero-carbon technologies entered the mainstream. Power generation from solar and wind shifted from subsidised luxury in developed economies to cost-competitive disruptor as costs plummeted. Renewables, awarded through competitive tender or, increasingly, as merchant operators, now dominate new build capacity in power markets. Electric vehicles, energy storage and other grid-edge technologies are at an earlier stage of commercialisation but signal the coming seismic change. Policy is gathering momentum, the IMO regulation to limit sulphur emissions in shipping just one example.
Capital markets started to withdraw finance, reflecting changing public perception – the energy sector’s weighting in the S&P500 halved from 2010 and is now just 5% of the index. Corporate strategies began to shift, with leading IOCs leaning towards lower carbon intensity gas production and establishing new energy businesses to invest in zero-carbon assets. Saudi Aramco’s IPO in December 2019 indicates changing attitudes among fossil-fuel-dependent economies to the future energy mix.
5. Unknown unknowns
Planning and expected trends can be shattered in a moment by unexpected events. Two stand out. Macondo in 2010 was one, with lasting lessons learned about health and safety and operating in a frontier environment. Despite the disaster, deepwater oil and gas production increased by 50% to 10 million b/d in the decade. Fukushima in 2011 was another. The resultant closure of Japan’s entire nuclear fleet drove up demand (and prices) for coal, gas and oil as utilities resorted to alternative fuels. As well as prompting Japan to review its long-term energy security, the risks exposed by the accident continue to undermine confidence in nuclear, even with its zero-carbon credentials.