Irrespective of the challenging environment in which we currently operate, we believe that the long-term market fundamentals are robust – and Petrofac is well positioned to benefit, with strong credentials in promising sectors of the market.
Among industry analysts, there is consensus that global energy demand is set to grow over the long term and that hydrocarbons will continue to play a significant role. The most recent analysis from the International Energy Agency (IEA) estimates that demand is set to grow by 30% by 2040 under the new policies scenario1 – by which time the world’s energy supply mix will divide into four broadly-equal parts: oil, gas, coal and low-carbon sources2.
Large-scale investments in oil and gas infrastructure will therefore be needed to meet this demand and to offset a natural decline in existing production.
Demand for oil is forecast to grow by 10 million barrels per day, or 12%, to exceed 103 million barrels per day by 2040:
Meanwhile, demand for gas is estimated to grow by more than 50%.
Clearly, in order to meet this demand, continued investment in the exploration and production of hydrocarbons will be required. Indeed, the IEA suggests that its projections to 2040 will entail a cumulative investment in the oil and gas sectors of some US$23 trillion. This represents an annual average of US$700 billion for upstream oil and gas3 (see the table below).
Of course, the future for the oil price environment is far from clear, and the IEA concedes that there is a large element of uncertainty around its analysis. Much will depend on government policies, the level of investment in each energy source, and the approach of the main oil producers.
The IEA therefore presents two alternative scenarios: a current policies scenario, under which governments fail to meet the intentions set out in the Paris Agreement on climate change; and a decarbonisation scenario, in which governments go further than the Paris Agreement to limit long-term global warming.
In the current policies scenario, the IEA estimates that the demand for oil will increase by more than 24 million barrels a day through to 2040, and demand for gas will grow to reach 24% of the global energy mix (up from 21% today).
Even in the decarbonisation scenario, oil and gas will continue to feature prominently in the global energy mix. Demand for oil may slip back to 73 million barrels a day by 2040 but will still account for 22% of the global energy mix, whereas gas will account for another 22%. So, even in a decarbonisation scenario, continuing investment in the oil and gas infrastructure will remain a necessity.
We expect that clients in our core markets will continue to invest in long-term strategic projects – especially in regions with lower marginal costs of production. We are well insulated from a sustained period of lower oil prices.
Meanwhile, we see an in-built need for re-investment in existing fields in order to arrest their declining production. Indeed, once production has peaked, a conventional oil field can expect to see average declines of around 6% per year4 and, especially in a period of lower oil prices, re-investing in these assets can deliver a more immediate return on capital employed than many exploration and production projects.
The IEA notes that there is potential for a significant supply gap which, at some stage, will necessitate a return to investment: “One year of low resources approved for development (i.e. 2015) can be compensated for with relative ease by rises in subsequent years. Two years with few new conventional project decisions (i.e. 2015 and 2016) creates a greater threat to future activity levels. But if a low level of final investment decisions on new conventional projects were to persist into 2017 as well, then approvals in future years would have to be consistently around historic highs – 21 billion barrels per year – in order to avoid a supply crunch into the 2020s.”
The Organization of the Petroleum Exporting Countries (OPEC) provides an alternative yet broadly similar analysis. In its 2016 World Oil Outlook report5, it estimates that oil demand will reach 99 million barrels per day by 2021 and will grow to exceed 109 million barrels per day by 2040.
OPEC also believes that this will require oil-related investments of at least US$10 trillion, and asserts that: “Given the demand and supply outlook, there is a need for significant investments across the entire industry… OPEC Member Countries remain committed to investing in new capacity and necessary infrastructure as they have always done as reliable suppliers of crude oil and products.”
The new industry environment offers a definite opportunity for us, and we have clear advantages, given our business model and our delivery-focused culture.
1 International Energy Agency, World Energy Outlook 2016, the new policies scenario is the main scenario which incorporates existing energy policies as well as an assessment of the results likely to stem from the implementation of announced intentions, notably those in the climate pledges for CPO21 (the 2015 United Nations Climate Change Conference, also known as the Paris Agreement).
2 International Energy Agency, World Energy Outlook 2016 (which, under its central New Policies Scenario, suggests that by 2040, coal will account for 4,140 million tonnes of oil
4 International Energy Agency, World Energy Outlook 2013
5 OPEC World Oil Outlook, 2016