Energy vs. Emissions

Increasing Green Scrutiny Shakes Up Power Mix

By Amy McLellan

The world’s production and consumption of energy is changing – and changing fast. Needing more energy to meet the needs of a growing and increasingly prosperous population needs to be squared with the need for far fewer emissions in order to keep a lid on rising global temperatures.

The world has been doing well on the “more energy” front. In 2017 more than 120 million people worldwide gained access to electricity, marking the first time the total number of people without access fell below 1 billion. There is still much more to be done, however: about 80 percent of the world’s population live in countries where average energy consumption is less than 100 gigajoules per head, a measure used by the UN Development Index as an indicator of development and well-being.

The challenge, however, is to produce this additional energy while simultaneously reducing emissions in order to limit warming to “well below 2 degrees Celsius,” the main goal of the 2015 Paris Agreement. While progress is being made, most scientists agree the pace of change is far too slow.

Certainly, there is no sign of the world losing its appetite for fossil fuels anytime soon. The International Energy Association’s influential World Energy Report 2018 forecasts that world energy demand is expected to grow by more than 25 percent to 2040, requiring investment of more than US$2 trillion a year. Oil will continue to play a significant role in the global energy system in 2040, although just how significant depends on the speed and scale of the energy transition: scenarios in BP’s Energy Outlook 2019 range from demand of 80 million barrels per day, or bpd, to 130 million bpd.

Gas will increasingly be the fuel of the future: BP’s economists expect it to grow by nearly 50 percent by 2040. And while coal flatlines over most long-term scenarios, it’s worth pointing out that the age of coal is far from over. Coal use in power generation remains a common feature of developing Asia, where the average age of a coal-fired plant is 12 years, decades short of average lifetimes of about 50 years, suggesting a long tail of coal combustion in years to come.

Oil Capital Discipline

Oil prices may have recovered from the post-2014 slump, but nobody’s getting carried away. Wood Mackenzie’s price forecast for benchmark Brent crude is US$65 per barrel for 2019 and US$68 for 2020.

Big banks are even more cautious: Goldman Sachs has cut its average price forecast for Brent crude to US$62.50 while HSBC has gone for US$64 for 2019 and US$70 in 2020 and 2021.

Oil companies, too, are still sticking to a policy of continued capital discipline, although analysts worry this will lead to a future supply crunch. Wood Mackenzie forecasts that global oil and gas development spend needs to increase by about 20 percent to meet future demand growth. After a low of US$460 billion in 2016, investment is expected to grow to more than US$500 billion in the early 2020s, well short of the 2014 peak of US$750 billion, creating concerns there’s not enough resource renewal to sustain production over the next decade.

For hard pressed supply chains, however, 2019 does look a little brighter. Exploration budgets, yet to recover from 60 percent cuts during the downturn, are being unlocked to replenish reserves. Analysts at Wood Mackenzie expect about 45 to 50 large projects to take final investment decisions this year, up from 40 in 2018. Much of this development spend will be offshore.

Rystad Energy expects 33 floating production storage and offloading vessels, or FPSOs, to be sanctioned through 2021, 15 of which will be monsters with production capacity in excess of 80,000 bpd.

This is good news for the shipping and heavy transport sector, although companies remain wary of ongoing volatility in an industry characterized by boom-and-bust cycles.

“The oil and gas sector seems to be recovering; however it remains volatile as producers battle with a
market that can move from oversupplied to undersupplied in a short period, and to manage the inevitable transition to energy from non-fossil fuel sources,” said Dan Leach, projects team manager at Hemisphere Freight Services. “The recovery does mean there is hope for some sidelined projects to come back online and thus provide opportunities for our industry, but time will tell.”

Latin America Exploration Hotspot

After a number of tricky years, Brazil is back with a bang and has surpassed Mexico and Venezuela to become Latin America’s biggest producer. Daily output is 2.5 million bpd and could hit 5.5 million bpd by 2027. The country’s pre-salt deposits in the deep waters of the Atlantic Ocean continue to attract international oil companies looking for the billion-barrel finds with the potential to really move the needle. ExxonMobil, for example, has been adding to its footprint in Brazil, where it now holds about 2.3 million net acres. This year it will be acquiring 3D seismic and obtaining permits to kick off exploration drilling in 2020.

Guyana is also primed to shoot up the league table of producing nations. This country of just under 783,000 people could easily become the fourth-largest oil producing nation in Latin America by the next decade, and might even overshoot Venezuela and Mexico if they fail to address ongoing production declines. ExxonMobil made its 10th discovery here in December 2018 when the Pluma-1 well hit oil in the Cretaceous, taking the recoverable resource volume on the Starbroek block to more than 5 billion barrels of oil equivalent. There are still 17 prospects to drill on the block, which has to date yielded an enviable strike rate of 83 percent. It’s shaping up to be a significant development hub, with ExxonMobil envisaging production of 750,000 bpd by 2025.

Elsewhere in Latin America, much has been made of the potential of Argentina’s shale resource to replicate that of the U.S. The unconventional oil and gas resources in Argentina’s Vaca Muerta shale formation are world-class but as yet this is still in the early days. Current production from the Vaca Muerta is 160,000 barrels of oil equivalent per day, or boepd, but could reach almost 900,000 boepd by 2024 if the country can attract US$4 billion of investment a year, according to Wood Mackenzie. The key will be the regulatory environment and investment climate to attract investment in acreage, drilling and the associated railroads and pipelines to get the oil to market.

Africa Stepping on the Gas

Natural gas is the fastest-growing fossil fuel, set to overtake coal by 2030 to become the second-largest source of energy after oil. Much of this growth will be driven by China’s “blue skies” policy, as consumption there moves from being roughly half that of the European Union today to 75 percent higher by 2040.

Liquefied natural gas, or LNG, is poised for a spending spree, with analysts at Wood Mackenzie expecting spend of US$150 billion to US$200 billion over the next 24 months and a record number of LNG projects set to take final investment decisions this year.

In Africa, where natural gas demand is expected to more than double in the period to 2040, Italian energy giant Eni has signed off on its US$4.7 billion Coral South project offshore Mozambique, which is being produced via a floating LNG vessel and is due onstream in 2021.

Anadarko is expected to take a final investment decision on its Area 1 gas reserves, also in the deep waters of offshore Mozambique, later this year. Unlike Eni, the U.S. company is targeting an onshore LNG facility initially consisting of two LNG trains with total nameplate capacity of 12.88 million tonnes per year. A February 2019 attack by armed gunmen, which left one contractor dead and six injured, has left the Anadarko construction site in lockdown and may signal that offshore facilities are not only a cheaper and more flexible option for LNG projects, but are also more secure.

Certainly, floating LNG, or FLNG, may prove a useful model for gas development in West Africa, which has long struggled with monetization of its vast and largely untapped gas reserves. Last year Golar LNG proved the concept when it began production offshore Cameroon via the Hilli Episeyo FLNG vessel.

The BP-led Tortue LNG project, which straddles the maritime boundary of Mauritania and Senegal, has also opted for FLNG. This is a landmark project for both countries, targeting 15 trillion cubic feet, or Tcf, of recoverable resources to create a major new supply hub in the Atlantic Basin. The Fortuna FLNG project in Equatorial Guinea has stalled after its operator, Ophir Energy, failed to raise financing for the project. Sources suggest the government will seek a new investor for the 3.7 Tcf gas block.

African waters continue to yield major gas resources. French energy giant Total recently made a massive gas strike with the Brulpadda-1 well off the coast of South Africa. The company plans to acquire 3D seismic this year, followed by four more wells.

If oil dominated African output in the 20th century, then the 21st century will be all about gas: by 2050, according to PwC, Africa’s oil and gas production is expected to increase by 74 percent, mainly driven by gas production.

Russia Pivots East

Meanwhile, massive gas developments are underway in Russia, which is eyeing energy-hungry markets in China and beyond as it continues to pivot east.

Shrugging off sanctions, Novatek has signed a US$2.5 billion construction contract with Italy’s Saipem and Turkey’s Renaissance services company for its giant Arctic LNG 2 project in the Yamal-Nenets autonomous district, north of the Arctic Circle, which is due online in 2022-2023.

This will be a mammoth project, requiring specialist equipment and experienced personnel to handle the extreme temperatures. “You need specialized equipment for temperatures of minus 40 degrees and it takes time to procure this and find the right people who are willing to work in these remote areas,” said Paul van Gelder of Mammoet, which worked on the successful Yamal LNG plant in the Russian Arctic, developing specially adapted self-propelled modular transporters for the hostile frozen environment.

Activity levels in Asia-Pacific, particularly offshore, have been muted in recent years – other than in China, where offshore drilling is on the up. Finds of note in recent months include an oil find at Mahu in the Junggar basin, with about 100 million tonnes of recoverable oil. The country is also keen to boost domestic gas production, with CNPC ramping activity at its flagship shale gas play at Chuannan in Southern Sichuan as well are targeting conventional gas plays, such as the Lianhua gas discovery near Beijing.

Piling on the Barrels

The Organization of Petroleum Exporting Countries may be showing admirable restraint in complying with agreed cuts, but the region is readying itself for increased production. “There’s renewed interest in big oil, gas and petrochemicals projects in the Middle East,” Mammoet’s van Gelder said. “We’re seeing ADNOC, Aramco and others pushing the button on big projects that will start to come through in 2020-2021.”

The United Arab Emirates continues to invest heavily across the energy sector, from building the world’s largest oil storage facility to seeking to ramp production from its oilfields. Rystad Energy forecasts the UAE’s oil production could grow from 3 million bpd to 3.71 million bpd in 2025. There are also signs that oil production in the Neutral Zone between Saudi Arabia and Kuwait, shut due to disputes since 2015, might be restarted this year, according to reports by S&P Global. The fields there have a combined capacity of 500,000 bpd.

Iraq, still in recovery from the war, is also ramping production from its giant fields in the south, Rumaila, West Quarna-1 and West Qurna-2. Rystad Energy forecasts the country’s oil production could grow to 6.15 million bpd in 2025. Oman is also investing for future growth, upstream and downstream.

Energy Transition Already Underway

Increased exploration and production activity ensures a pipeline of development projects to sustain production over the next decade. Yet, increasingly, these long-term capital decisions must be weighed against the pace of the world’s energy transition: a multibillion-dollar project with a 20-year production tail could find itself on the wrong end of emissions rules designed to “keep fossil fuels in the ground.”

Oil companies are attempting to plot their own energy transition, but as yet these investments are just a toe in the water, with the oil majors allocating less than 3 percent of their budget to renewables since 2016. This caution is not surprising. Even such august forecasters as the International Energy Agency have been wrongfooted by the speed and scale of the energy transition.

For operators in the project cargo sector, the giant wind turbines that are powering the energy transition are generating plenty of work. Wind power continues to grow globally, with 50.2 gigawatts, or GW, of new wind power added in 2018 to take installed capacity to 600 GW, and analysts expecting a further 723 GW to be added between 2019 and 2028.

“Wind energy has performed well over the last couple of years, which has provided more transport and shipping opportunities for us,” Hemisphere Freight Services’ Leach said. “There can be no doubt going forward an increasing number of major projects will center around renewables.”

He noted, however, that a fast-growing sector where the technology is still evolving creates its own challenges. “For our industry it will be a big challenge to keep pace with this ever-changing sector and the opportunities it can represent,” Leach said.

It is also a sector with its volatility as a result of its dependence on changeable subsidy regimes and not-in-my-backyard opposition to onshore wind farms.

European Winds Of Change

Wind energy provided 14 percent of the EU’s electricity last year, up from 12 percent in 2017, as capacity rose by 11.3 GW to 189 GW, of which 171 GW is onshore and 18 GW offshore. Continued growth in capacity and the use of more powerful turbines are helping to drive up wind’s share in the electricity mix, led by Denmark (wind accounted for 41 percent of its electricity), Ireland (28 percent) and Portugal (24 percent).

While onshore wind has been stalling, particularly in Germany and the UK, offshore is powering ahead. A UK Sector Deal, for example, sets out an ambition for 30 GW by 2030, about one-third of the country’s electricity needs, which would require a doubling of the pace that offshore wind has been deployed to date, from about 1 GW per year to 2 GW per year through the 2020s.

“The UK Sector Deal will deliver an enormous boost to offshore wind in the UK, with capacity set to almost quadruple in a decade,” said Iv├ín Pineda of WindEurope. “This move will consolidate the UK as the largest European market for offshore wind by 2030, making it the second-largest globally behind China.”

Australia has been having a big push on renewable energy and 2018 was a breakthrough year, with more than 80 wind and solar farms worth more than A$20 billion underway, double the level of investment seen in 2017. Unsurprisingly solar is big in Australia, with on average six solar panels installed per minute in the country, but wind is also on the up. In 2017, Australia’s wind farms produced 33.8 percent of the country’s clean energy and supplied 5.7 percent of Australia’s overall electricity, with Hemisphere Freight Services and Mammoet both reporting a busy start to 2019 keeping up with the work flow.

China has been a phenomenon when it comes to clean energy, transitioning far quicker than many analysts expected. Wind and solar generated 8 percent of China’s power needs last year, up from 3 percent five years ago. According to Greenpeace Unearthed, power generation from wind and solar in China in 2018 was equal to the total power generation of the UK and the Netherlands.

Back to the Future

But not everyone is focused on renewables. From 2000 to 2010, while economists were busy worrying about looming peak oil, engineers in the U.S. were busy finding a solution. Two established producing technologies – hydraulic fracking and horizontal drilling – were combined to unlock vast resources of previously unproducible oil locked in tight rocks. It has been a global game-changer, with 60 percent of new oil production since 2008 coming from the U.S., where output continues to exceed all expectations: drillers there pumped almost 11 million bpd in 2018, beating the 1970 record of 9.6 million bpd, and expected to remain above 14 million bpd through 2040. Gas production will also surge, to 43 Tcf by 2050, driving a domestic gas-to-power boom but also seeing the country continue to export gas, via pipeline to Canada and Mexico and via LNG to global markets.

By 2021, the IEA thinks the U.S. will become a net energy exporter, with net exports rising to nearly 4 million bpd by 2024; the Energy Information Administration calls it a year earlier in 2020 and expects the country to remain a net exporter through 2050.

There are some barriers ahead, namely above-ground infrastructure bottlenecks that will moderate growth until new pipeline capacity comes online to shift more oil to market. IHS Markit, for example, believes Texas needs to add more than 10,000 miles of new, currently unplanned, pipeline infrastructure projects in the next 30-plus years to achieve its full production potential. In addition to pipeline infrastructure, there will need to be additional storage terminals, processing plants, refineries and port capacity in the U.S. Gulf Coast region to ship the product to market.

This boon has created busy orderbooks for the heavy-lift and transport industries. “Demand from the energy industry is very strong and there are great opportunities, particularly in the Gulf region and parts of Canada,” said Joel Dandrea, chief executive of the Specialized Carriers & Rigging Association. “There’s also a big infrastructure push in the U.S. right now, so that’s also creating demand.”

Dandrea noted that a shortage of skilled labor, from truck drivers to crane operators, is an ongoing challenge. “There is enough capacity in the industry to handle this work,” he said. “We’re pleased to see our members, sometimes three or four different companies, working in innovative ways and coming together in partnership to fulfil these projects.”

President Trump has called this “a golden era of American energy,” and he’s not wrong. “The U.S. trade deficit will evaporate and its foreign debt will be paid quickly thanks to the swift rise of American oil and gas net exports,” said Rystad Energy’s senior partner, Per Magnus Nysveen, who said the U.S. is destined to soon outpace Saudi Arabia when it comes to gross exports of oil and petroleum products. “The tanker shipping industry will see the boom of the millennium, as the excess fossil fuels from America will find plenty of eager buyers in fast-growing Asia.”

It’s an amazing transformation and its ramifications go beyond pure economics: U.S. oil dominance may well have geopolitical ramifications that will be felt around the world.  

Amy McLellan has been reporting on the highs and lows of the upstream oil and gas and maritime industries for 20 years.

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