Welcome to our members’ quarterly that looks at the trends that are shaping the future of energy companies today. Our approach remains to be an open source, impartial platform that aggregates content for our membership. This Quarterly, like the ones before it, reflect the views of our members from all around the world. There is a plethora of platforms that offer you on the spot news to whichever device you require. However, the purpose of all of our content is to dig beyond the investor relations and outside of the usual sell side corporate access channels. We look to talk to, and about, the people at the ‘coalface’ of our industry.
So here we are, halfway through the year, in the fourth full year of the “deepest and longest” market downturn on record. For this Quarterly it therefore seemed an apt time to reflect on the current state of play in the place where the story all began. As North America’s energy renaissance gains further momentum it can, at times, feel like you’re stepping into another world when you land in Houston. While globally operators continue to be battered by price, the US is booming in comparison. If it doesn’t feel that way, have a look at the rebound of the rig count in the US vs Africa. So why is that? What unique regional challenges do we face and what opportunities present themselves?
We observed earlier in the year that the cost reductions achieved by US unconventional players has simply been remarkable. Break-even costs across the major shale producing states are now up to 60% lower than before the crisis. Find me another industry that can reduce costs this quickly. In short, never bet against the American economy – history has taught us there is only one winner. A poignant note here however, is that whilst producers are surviving many OFS firms continue to suffer, and a round of consolidation and M&A that we have seen in the European offshore market may be on the cards.
The current news cycle seems to be dominated by the energy transition. Wherever you sit on this I find it helpful to start with some facts. Fossil fuels are still 81% of the energy mix, demand is growing and while a part of this will undeniably go to renewables, the largest chuck is going to be natural gas. The abundance factor of natural gas is already such a compelling story, with the United States being home to the most competitive pricing structures anywhere in the world. The attractiveness of this gas is compounded by the flexibility it offers for power generation, industrial application and how it’s can be paired with renewables. It is the future fuel of choice, and with 26GW of coal generation set to be retired in the US, that future is a lot closer than many people realise.
Supply is still being driven upwards by a massive amount of additional capacity coming online, with more expected post-2019. This has resulted in some commentators predicting a massive glut and stranded cargos. Yet we simply didn’t see this in 2017 despite many such bold predictions. Why? Put simply demand is up despite all predictions, with worldwide consumption 11% higher than forecasts according to our latest survey. In fact, if you look internationally we are seeing so few FIDs taking place we could be heading for a gas shortfall as soon as 2022. The pressure on supply short-term is compounded by the recent decision in China to double natural gas in the energy mix to 12%. And of course, this all assumes we start building new infrastructure now. So, while we may have some pricing bumps, the fundamentals for the next five years remain relatively strong. The US is well placed with low full cycle costs and existing brownfield facilities ready to grab any incremental demand before greenfield sites in Western Australia and East Africa come online.
Natural gas is effectively a global story that is developing right now. Midstream companies are facilitating this but they do face their own unique set of challenges. How do they repurpose, reverse and build new green pipelines to take advantage of demand not only globally but domestically? The ability to execute midstream infrastructure today has a lot of unique challenges. Electricity prices and some natural gas 5 prices have in fact spiked due to a lack of connectivity in the past 12 months. Recently Russian LNG had to be imported to the United States to facilitate supply. Clearly there is work to be done around infrastructure and the discrepancy between what producers want and what midstream contracts, is central to this issue. The old adage that when pipelines don’t get built no one wins remains pertinent here.
This leads itself to the question of who is going to pay for all of this? Competition for capital remains tight, as investors jump from irrational optimism to needless pessimism. The industry has developed more complex financing structures since the crisis and with more shale operators generating free cash flow to cover the cost of new wells, we are through the worst. People often forget that capital markets have not been easy for a very long time. Prior to the collapse in prices banks were constrained with internal tightening in the aftermath of the credit crunch. In many ways capital markets have not been truly open for over a decade. However, even with any additional financing, the industry will want to keep a close eye on the current domestic and international regulatory landscape. The impact of Chinese tariffs on US LNG prices could be particularly troublesome.
As you read through this Quarterly, we’re confident you will come away with actionable business insights based on the trends our network has identified. So far this year we have charted participants from 98 countries at our events. The Quarterly tries, as always, to connect the dots between the challenges you all face today. We don’t like leaving networking to chance and hope to see you all during the course of the Q3.