As we are now in the last quarter of 2017, it is a good time to reflect on what has changed for global energy markets in the last few months. Which trends have come and passed, which are here to stay with us for the upcoming year, and what does the future hold?
Shale oil continued to get much attention, with many experts predicting that shale oil production would not be a viable solution in current oil market conditions – many thought this source of energy should be put aside for a rainy day. However, shale oil production costs decreased over the past year by around $5 per barrel per year, with the production process in many fields profitable at around $50 per barrel. This trend of cost reduction is expected to continue for certain fields, so we can expect shale oil to continue to be an important element in the crude oil markets going forward.Â
Even if the prime cost reduction rate was expected to decrease between 2018 and 2024, in 2024 shale oil production would still be economically efficient, at an oil price of $35 to $40 per barrel. This price level is thought possible in the medium term, due to potential global oversupply in crude oil, a reduction in demand for crude, and a constant and relatively rapid expansion in the adoption of electric vehicles.Â
The latter might seem improbable, but we are already seeing the ownership costs of electric cars becoming closer to those of petrol cars. In addition, OPEC re-evaluated its forecast for a global electric car fleet by 2040 to five times more than originally anticipated, to 266mn vehicles.
An additional reason for the wider adoption of electric cars is the introduction of updated regulatory requirements for the performance of motors, with regards to emissions, which will come into effect in four major automobile consumer markets – Europe, China, the US, and Japan.  In Europe, France, Germany, the UK, and now Spain have all declared their intention to ban the sale and use of internal combustion engine-based cars by 2030 to 2040.Â
If we now turn our attention to gas markets, they have also been facing stronger competition – and it will be more of the same heading towards 2020, when additional supplies of liquefied natural gas (LNG) from the US, Australia, and other countires reach the market.Â
This surplus is not expected to be consumed by Asian countries, since Japan – the largest LNG consumer – is expected to restart its nuclear power plants in the near future, consequently limiting LNG imports.Â
Price levels are also an issue. European and Asian prices are almost the same – Japan buys LNG for around US $5.25 per one million British thermal units (MMBtu), and Europe for US $4.87.Â
A similar situation can be seen in China – presently the country relies on imported LNG volumes, primarily from Australia, as well as pipeline gas supplies from Turkmenistan, and an increasing production of unconventional gas in China itself. The country possesses large reserves of shale gas, which are expected to cover around 25% of local demand for gas by 2030.
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In Europe, the LNG situation is also evolving. Around 75% of European regasification capacities are being stopped for the time being, due to the lack of internal pipeline connections that would transport gas from the terminals to remote areas. The necessary investment funds have been assigned to build these infrastructure systems, however.
Electricity generation through solar and wind power will continue to grow, although not at a rapid enough pace to affect the import of gas from countries such as Russia. For this reason, Russia is looking at large gas monetisation projects at home, including methanol production and material take-off.Â
In the US, gas will be substituted in part by renewable energy sources, and excess gas will be directed to export routes. Thus, we observe a strike to both the demand and supply sides, which will have an important impact on the market trends.Â
Analysing some of the key growth factors and challenges associated with the changing oil and gas markets, we can state that key demand growth factors and scenarios could include the following:
• Stronger oil demand recovery
• The development of the transportation sector in Asia
• Lower costs associated with exploration and production
• The OPEC/ Saudi Arabia production policy
• A possible slowdown in the US for tight oil
• Oil and gas price stabilisation
• US-dollar depreciation
• Projects being re-evaluated and, in some cases, being put on hold
On the other hand, we anticipate that some of the challenges and risks that the industry might face could include:
• An increase of unconventional oil production in North America, and of gas in China
• The easing of sanctions on Iran
• An expansion in gas-to-liquid (GTL) and biofuels
• Deepwater shelf production
• A number of major new projects being announced
In conclusion, these are clearly very interesting times for the energy sector. Planning for future investments in upstream and downstream must take into account the possible major changes in the transportation sector over the next 20 years in key regions such as the US, China, and Europe because, at the end of the day, if we need less gasoline and diesel due to electrification, then refiners will need to find viable outlets for naphtha and diesel.
