The long-term market fundamentals are robust.
We believe that the long-term market fundamentals are robust – and Petrofac is well positioned to benefit.
Among industry bodies, such as the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC), there is consensus that global energy demand should grow strongly over the mid-to-long term, and that hydrocarbons will continue to play a significant role.
The most recent analysis from the IEA estimates that energy demand is set to grow by almost 27% 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 sources. This will see demand for oil growing by more than 11 million barrels a day, or 12%, to exceed 106 million barrels a day. Meanwhile, demand for gas is estimated to grow by 44% to reach 5,399 billion cubic metres per year.
Even under the IEA’s sustainable development scenario2, demand for hydrocarbons remains reasonably strong. Demand for oil would remain broadly flat to 2025, before falling back by around 25% by 2040, predominantly driven by fuel efficiency and electrification of road transportation. The only sector to register growth in oil demand under this scenario would be petrochemicals. Meanwhile, demand for gas would increase by 12% by 2025 and remain at those levels in 2040.
Under either scenario, large-scale investment in oil and gas infrastructure will remain necessary. Indeed, under its new policies scenario, the IEA anticipates cumulative investment in the oil and gas sector of more than US$20 trillion by 2040, which represents an annual investment of more than US$900 billion. Under the sustainable development scenario, the equivalent figure would approach US$14 trillion, or more than US$630 billion each year.
We therefore expect clients to continue to invest in long-term strategic projects, especially in regions with lower marginal costs of production such as the Middle East and North Africa (MENA). We also see opportunities in adjacent sectors where we have been growing our capability, such as offshore wind generation, as well as the potential for a substantial market in late-life and decommissioning services.
1 International Energy Agency, World Energy Outlook 2018, the new policies scenario “provides a measured assessment of where today’s policy frameworks and ambitions, together with the continued evolution of known technologies, might take the energy sector in the coming decades. The policy ambitions include those that have been announced as of August 2018 and incorporates the commitments made in the Nationally Determined Contributions under the Paris Agreement, the 2015 United Nations Climate Change Conference, but does not speculate as to further evolution of these positions. Where commitments are aspirational, this scenario makes a judgement as to the likelihood of those commitments being met in full. It does not focus on achieving any particular outcome: it simply looks forward on the basis of announced policy ambitions. Among recent policy announcements, the New Policies Scenario includes the European Union’s new, more ambitious 2030 renewable energy and energy efficiency targets. It likewise includes the June 2018 announcement by China of a new three-year action plan for cleaner air. It reflects the impact of the planned revision of the Corporate Average Fuel Economy standards in the United States, as well as the announced US Affordable Clean Energy rule that replaces the previous Clean Power Plan. It also takes account of Japan’s revised basic energy plan and Korea’s 8th National Electricity Plan. It is the New Policies Scenario to which we devote most space and attention.”
2 www.iea.org/weo/weomodel/sds/ “Based on existing and announced policies – as described in the IEA New Policies Scenario – the world is not on course to achieve the outcomes of the UN SDGs Sustainable Development Goals most closely related to energy: to achieve universal access to energy (SDG 7), to reduce the severe health impacts of air pollution (part of SDG 3) and to tackle climate change (SDG 13). The SDS Sustainable Development Scenario sets out an ambitious but pragmatic vision of how the global energy sector can evolve in order to achieve these critical energy-related SDGs. The SDS starts with the SDG outcomes and then works back to set out what would be needed to deliver these goals in the most cost-effective way. The benefits in terms of prosperity, health, environment and energy security would be substantial, but achieving these outcomes would require a profound transformation in the way we produce and consume energy.”