Petrotahlil - The economic impact of the coronavirus pandemic could exacerbate the supply/demand imbalance for some petrochemicals brought on by huge capacity expansions in recent years, the International Energy Agency (IEA) said on Wednesday, as energy investment this year stands to drop to historic lows.

The impact of global economic collapse brought on by the coronavirus outbreak has led the agency to reverse its projections for energy sector investment growth this year, from a 2% increase to a 20% drop, representing an investment shortfall of $400bn compared to 2019, according to the agency’s energy investment report.

The IEA report traditionally looks at spending patterns the previous year, but the dramatic disruption this year led the agency to look at spending in 2020 so far and projections for the future.

Source: IEA

OIL AND GAS FALLS
The drop in investment is likely to be sharpest for the oil and gas sector, with spending to fall by a third this year, and the sharpest declines in the US shale sector, which is likely to see capital flows halve in 2020.

“We see the impact everywhere, but our numbers show that oil and gas sector investments will fall by one third this year, and this is even higher than what we saw in the year 2014,” said IEA executive director Fatih Birol, speaking at a press briefing on Wednesday.

“Within the oil and gas sector and the entire energy system, the biggest hit is on shale oil in the US. We expect investments in shale oil will decline by 50% with huge implications,” he added.

The long tail for oil and gas sector investments to reach maturity means that the impact of the substantial cuts to capital expenditure as producers move to shore up liquidity may not be felt this year, but implications are substantial for the years to come, according to IEA.

A year of substantially lower investment in 2020 could reduce global supply by 200,000 bbl/day in 2025, but if investment levels remain depressed for several years then that fall could swell to 9m bbl/day by then, threatening a return to the boom and bust cycle for the sector, according to Tim Gould, head of division for energy supply outlooks and investment.

A key difference between the budget-slashing seen by oil and gas majors this year and that during the 2014 oil price crash is that the earlier cuts were largely achieved through efficiencies, whereas there is less fat to cut now, meaning that the operational impact of belt-tightening is likely to be much more apparent.

“The scope for efficiencies is very limited now,” Gould said.

PETCHEMS EXCESSES
The majority of oil majors have also initialised stronger pivots towards the petrochemicals sector as a means of diversifying portfolios towards higher-margin products, and the collapse in spending is also likely to impact on investment decisions in that sector, Gould said.

The massive increase in commodity petrochemicals production in the US Gulf Coast to capitalise on cheap shale-derived feedstocks has led to production drastically outpacing demand growth, he added, noting that new ethylene capacity outpaced increases in consumption by 60% last year, with further expansions expected this year.

“Investment in petchems facilities has accelerated quite dramatically in recent years and moved well ahead of the rate of demand growth,” he said

“This mismatch on near-term capacity expansion and near-term demand… could be exacerbated by the effects of the pandemic… [but] the longer-term outlook for petchems product is still very robust,” he added.

RENEWABLES SPENDING FALLS
Investment in clean energy is also expected to fall this year, dropping by 11%, at a point where the number of coal-fired projects receiving the green light, largely in Asia, doubled in the first quarter year on year.

“The findings of this report are troubling in many ways, but if I had to pick one, for me there is a great risk that the lockdown the world has experienced may lead to a lock-in of obsolete energy technologies which could determine the energy patterns for years to come for our world,” said Birol.

Investment in clean energy technology – including renewables, efficiency and battery storage – has remained static each year since the agreement of the Paris accord, at around $600bn, before falling this year.

Falling prices for solar photovoltaic and onshore wind energy technologies means the impact of that spending has increased over time, but spending would still need to double from levels seen over the last five years to meet the accord goal of containing global temperature increases at or below 2˚C.

“Whether or not there will be an increase in the investment in clean energy will critically hinge on the recovery packages that the governments are now designing around the world,” Birol added.