The Energy Industry in 2014–an EIU Webinar

On Wednesday, January 22nd, the Economic Intelligence Unit sponsored a webinar on their forecast for the Energy Industry in 2014, part of a series of six industry-wide webinars that the EIU is putting on based on their industry reports that came out at the end of 2013.   I already did a post on three of those other webinars, on the retail and consumer goods industry, the automotive industry, and the financial services industry in 2014.

This webinar is on the Energy Industry in 2014, was presented by Martin Adams, the Editor for Energy based in Hong Kong, with additional commentary by Peter Kinnan, Lead Analyst for Energy based in London.


Global energy consumption is forecast to grow by 2.9% in 2014, up from 2.7% growth last year.  This means steady growth in this sector, but it is an uneven expansion.  There are significant differences between sub-sectors:   the growth in natural gas, nuclear power, and hydroelectric power are growing by around 3%, whereas coal and petroleum products will experience slower growth at around 2%.  Non-hydro renewables, on the other hand (solar, wind, geothermal) are experiencing 17% growth.  In terms of market share, however, the tables are turned, as renewables are as yet a very small percentage of the total global energy consumption.


The disparity of growth  rates in the various subsectors goes a long way in explaining the marked difference in mood among the various respondents who were surveyed by the EIU.

Survey Questions Agree Neither agree nor disagree Disagree
Governments in emerging markets will adopt a more “resource nationalist” approach to investment in the resources sector through raising taxes and royalties




Prospects for growth in the renewables sector will be better in 2014 than they were this year




Price of benchmark Brent crude oil will average < $95/barrel in 2014




My business will allocate more to capital expenditure in 2014 than it did this year




Negotiations over climate change policy will be concluded, culminating in an agreement adopted at the UN Conference on Climate Change in 2015




Risks to oil prices resulting from Middle East tensions will be greater in 2014 than in 2013 19.2% 25.5% 55.3%

These survey results will be referred to from time to time during the rest of the webinar to illustrate various points.

Next, Martin Adams will discuss each sub-sector individually, starting with oil.

3.  OIL

Although many respondents believe the oil price will dip below US$100, the EIU does not:  it believes that Brent oil price will average above US$100, probably close to US$105.  This represents a fall from US$109 in 2013.

One of the biggest factors effecting the price of oil is whether we will see significant new tensions in the Middle East and North Africa.  Based on the survey results (see chart in paragraph 2), only about a fifth of respondents believe that Middle East tensions will be greater in 2014 than in 2013.  This is partially because the survey was done in November, as a diplomatic breakthrough took place in the talks by the West with Iran regarding its nuclear program, leading to an interim agreement.

In any case, whatever happens to the political risks in 2014, the market is going to be comfortably supplied this coming year, and that accounts for the slight slip in prices for Brent crude oil from US$109 to US$105.

Where will the new oil production come from to meet the consumption demand?  New oil production activity will be centered on Iraq, Brazil, US and Canada.  In particular, US energy security and oil supply infrastructure continue to improve.  Iraqi oil production is being impacted by the situation in Syria, but nevertheless EIU expects that their production will be among the fastest growers  in 2014.  Brazil will experience growth, as drilling in ultra deep water continues.  A lot of the excitement in the oil and gas world is centered, however, in North America.  The oil tar sands in Canada and in the US there is a shale gas and tight oil boom.  The International Energy Agency (IEA) came out yesterday saying that in 2013, the US increased oil supply more than any other country has done in the last two decades.

Already, the US, which is already the second biggest energy consumer in the world, has benefitted in terms of its energy dependency.  Its net oil import dependence is at 34% in November 2013, according to the US Energy Information Administration, down from its peak in 2005 of 60%.  A lot of what the US imports is from the oil sands in its friendly neighbor Canada.

All of this means that non-OPEC oil production growth has been outpacing that in OPEC.  The oil output in 2014 will increase a little over 3% from last year in non-OPEC countries, whereas the growth in oil output for OPEC countries will be a little less than 2%.  There has been some disruption in production in OPEC countries such as Libya due to political turmoil.  In Iran, it is the sanctions which have had an impact.

In the US, which is at the heart of the non-OPEC growth story, although the supply situation is much improved, things have been held back by a pipeline network that is struggling to keep up.  In 2014, there will be some improvements in infrastructure that will start to kick in.  As a result, the gap between the two main oil price benchmarks, the West Texas Index (WTI) and Brent, is going to narrow.  There has been a lot of focus on the mismatch between the two benchmarks in recent times.  But as supplies start to move more smoothly around the US, we’ll start to see WTI edging up slightly even as Brent falls, thus narrowing the gap.  Its also worth noting that the IEA yesterday drew attention to how fast demand in the US has been growing.  It grew faster in the US than in China for the first time since 1999.  The WTI/Brent differential is going to be slice in half, to just under $6 in 2014.

Another factor influencing the US oil supplies in the long term is the decision on whether to let the Keystone XL pipeline, which would carry oil from Alberta’s oil sands down to the US, be built or not.  That decision, which is controversial especially with environmentalists, has been long-delayed, much to the frustration of the oil and gas industry, particularly in Canada.  However a decision is expected in 2014, perhaps even in the coming months.


EIU thinks that natural gas is the fossil fuel that is going to do better this year, certainly in terms of consumption growth.  A lot of this is thanks to Asia.  In places like China, Taiwan, India and South Korea, the appetite for gas is growing quickly.

In China, you’ll see that there is going to be a substantial dip from 20% growth in 2013 to about 15%.  In India, Taiwan and South Korea, the change will be positive, from about 2-4% growth.  These trends will continue into 2015, as growth increases to around 5-7% in those countries.

This increasing Asian gas demand is keeping gas prices higher there than in the rest of the world.  Where are the supplies going to come from?  Once again, it is the US that is pivotal when it comes to the supply of natural gas market because of the shale gas revolution.  One of the biggest questions is “what is the US going to do with all of this new gas?  Will it start exporting it to Asia in the form of LNG?  It’s not just a question about what the US is going to do, it’s also a question of what will happen in Canada.  Those two countries are going to be increasingly competing for energy markets.  On the EIU energy website , they argued there that, although Canada has been giving more initial approvals for LNG, it is the US that is better placed in the long run to catch the larger slice of the Asian market.  There may be  more approvals in North America in the coming months.  However, in the long term it is Australia that will grow the most in terms of LNG capacity in the coming decade, overtaking Qatar as the world’s top LNG exporter by the end of the decade.

Like gas from the US and Canada, Australian gas is mainly targeting the Asian market.  This year, two giants projects, Gorgon and Queensland Curtis LNG projects, will start up, boosting the supply by an amount that is roughly equivalent to the annual capacity of Malaysia, which is in itself another important LNG player.

When the US and Canada get their acts together, they are going to face some pretty stiff competition from Australia.  It will be interesting to see how they proceed with approvals in the coming year.

4.  COAL

Coal is another area where the US is pretty much in the center of things.  Like many countries around the world, coal has been a mainstay in the US for energy generation.  However, the regulatory environment is getting much harsher for the coal industry.  What happens this year could change the face of the American coal industry forever.  Despite the strong opposition in Congress to signing climate change legislation, Barack Obama has been pushing  the Environmental Protection Agency (EPA) to take regulatory steps to clamp down on emissions.  And in 2014 the EPA is due to finalize what look like stringent emission standards for new power plants that could go so far as to effectively make it impossible for new coal plants to be built.  Any measure that would be that strict would face legal challenges, causing the process to become more drawn out.  There will also be rules for existing coal plants that are going to follow the rules for new coal plants.  These are viewed with even more trepidation by the coal and electricity industries.

So far, US producers have been able to find overseas markets to export more to.  In the past this has included Europe.  As Europe’s economic recovery remains somewhat fledgling, coal is still going to look like an attractive option in European eyes because it is relatively cheap.  However, it is really China that is underpinning global coal demand and supply, as it accounts for almost half of each.  The Chinese government has been making a push to do something about the awful air pollution problem that affect many parts of the country.  Coal suppliers are worried about the impact of new measures that are designed to slow coal consumption and cut down on emissions.  Recently, we have seen the air pollution reduction targets that the central government has agreed to in recent weeks for China’s 31 provinces.

Nevertheless, China will have a very hard time weaning itself of coal.  Coal is cheap as well as plentiful in China.  The country has the world’s third largest reserves of coal.  Another reason why coal demand in China is going to be sticky is that the main alternative, which is to import more gas, is pretty costly compared to sticking with coal.  Even the latest regulations governing provincial emissions are not necessarily that ambitious.  So Chinese and global coal consumption is going to continue to keep edging upwards.


The topic of China is a natural segue into the next topic of non-fossil fuels, because the Chinese government has been trying to push its economy towards less-polluting fuels.  It has put up more nuclear reactors and wind turbines.  As far as atomic energy is concerned, four new reactors are going to come online in 2014.  However, it’s not just China:  South Korea, Russia, and India are all going to add a few new reactors each this year.  This will push global nuclear capacity to grow much estimated 373 gigawatts (GW) in 2013 to about 381 GW this year (growth of 8 GW).  That’s not the kind of explosive growth that the nuclear industry experienced before the Fukushima nuclear accident in Japan in March 2011; on the other hand, it’s not the collapse that was predicted by some people after that incident.  In the US, the growth of natural gas is the factor that is constraining possibilities of nuclear expansion, with some nuclear power plants even being shut down.

Plentiful supplies of cheap natural gas also crimp the opportunity for the growth of renewables, given that renewables remain expensive.  Despite that and the other problems that renewables face, they are achieving remarkable growth.  To be fair, although still expensive, the prices of wind turbines and solar panels have fallen in recent years.  China has helped to push things along by making such equipment cheaper with large-scale production.  Pollution has been a driver of China’s progress on renewable energy, especially given the growing impatience of the general population with the problem.  Also, there is a desire to give China’s domestic equipment makers in the wind power and solar sectors more of a market at home.  Energy security concerns feature into this as well, as do concerns about global climate change.

Speaking of action regarding global climate change, we don’t see an awful lot of reasons for optimism when it comes to international climate change negotiations.  These were supposed to lead to a treaty to replace the Kyoto Protocol, and that successor treaty is meant to be signed in December 2015.  Our survey respondents, like us, are pretty skeptical that we’re going to see much progress on that front this year.  Only about a fifth of them expect a breakthrough over the next 12 months.

Suffice it to say that there are many barriers to renewables, including the lack of direction in global climate change policy that was just mentioned.  There are low carbon prices in Europe, and we are expecting the EU to announce today its strategy for long-term climate and energy targets policy to 2030.  It looks as if the EU is not going to include renewable energy targets in its policy, but rather it will rely on carbon emissions targets.

Despite all of those dampening factors for renewables, they are going to make remarkable progress, with 17% growth projected in 2014, double-digit growth albeit a little less than last year’s growth of 22%.

If climate change negotiators were able to agree on a framework for forceful global action, the prospect for renewables would be much different.  Emissions on fossil fuels will reach nearly 160% of the level that were at in 1990.


  • Average Brent oil price in 2014:  US$104.75/barrel
  • WTI-Brent spread to narrow to US$5.78 in 2014
  • Chinese coal demand to rise by 4%
  • Non-hydro renewables to surge 17%
  • Fossil-fuel emissions to hit 159% of 1990 levels


1.  You said you are not optimistic about the outlook for climate change talks in 2014.  Why is that? 

We’re pessimistic that we will any major progress this year.  At the most recent set of talks which were held in November 2013 in Warsaw, we had the usual sort of 11th-hour compromise hobbled together, which didn’t bode well for progress in the next round, which will be held in Peru in December 2014.

Before that, we expect to see developed countries being pressured to lay out their own contributions to carbon emissions cuts.  Negotiators have avoided the word “commitments” which would be overly concrete so they call them “contributions.”

Even in Europe, which is a traditional leader in this area, we are seeing willpower being strained a little bit.  The European debt crisis, of course, has raised many questions about how Europe can pay for its climate commitments, particularly its subsidies for renewable energy.  The German Energy Minister just  yesterday said that his country was at the limits of what it could pay for green energy.  You’ve got utilities complaining about subsidies for renewables and the impact its having on them.  They are closing down some conventional plants which they say are not economical to run.  The industry is complaining that the energy costs in the EU are higher than in China and also higher than in the US.  In the US, you have brakes on any climate change legislation getting through Congress.

On international talks, the big problem is that there is an impasse between the developed economies, particularly chiefly the US on one side, and the developing economies, chiefly China on the other side, where each points the finger at the other and there is no agreement on who should bear responsibility for carrying the costs of any future cuts.  I am pessimistic about identifying a way of getting around that before the next meeting in December of this year.

2.  Do you see the shale revolution spreading further outside of the US in 2014?

The shale revolution has been talked about a lot in the past four to five years, and we’re seeing a pretty dramatic increase in total US gas production.  If you look at what people were forecasting five or six years ago, it would be that the US would become an importer of LNG.  However, what we are actually seeing is that by the end of the decade, US will become a net exporter of LNG, largely due to the increases in gas production and the ability to direct supplies to international markets other than the US.  This has created a chain reaction of other countries exploring their unconventional gas potential.

In most other regions such as Europe, Asia, and Latin America, shale gas will develop much slower than in the US.  The countries that are likely to see development in shale gas output will be China, Australia, and perhaps Argentina, although the resources are more liquids driven, in that they are in the form of shale oil rather than shale gas.

Some countries in Europe have started the exploration phase, but have shown quite little progress so far, such as Poland.  The UK is getting more interested.  Ukraine has awarded exploration licenses for shale gas exploration and development.  However, some countries in the EU have issued an outright ban on fracking, such as Franc, or have put in place a moratorium on shale gas development until they get more knowledge  on the potential environmental impacts.

So there has been quite rapid growth in the US in the past five years, which will set the stage for the US to be an exporter of LNG.  There is one terminal already under construction, and another four have been approved for export to non-FDI countries.  However, we won’t see US LNG on the market until towards the end of the decade, when you’ll see a fairly substantial impact on supply in the 2020s.

China is another country that takes shale gas very seriously, mainly because of its acute dependence on coal.  Its gas consumption is growing rapidly, and to avoid too great a dependence on gas imports, whether it’s pipeline or LNG; they want to develop their own unconventional gas assets.

I would expect that, outside of North America, the pace of the development of shale gas to be fairly slower than that experienced in the US in the past five years.

We have seen a lot of hype over the past couple of years about China’s potential.  No doubt there are some big resources there, and you’ve got Shell and some other majors there exploring, in addition to some ambitious government targets in place.  However, people have really woken up to the barriers to shale gas production since that initial surge of hype, such as:

  • a different kind of geology than you have in the US
  • water shortages in many of these regions where the resources lie
  • service industry is not in place
  • no access to pipelines
  • gas pricing reforms needed

It’s going to take a long while for things to pick up in China with regards to shale gas production.  That being said, there have been interesting figures that came out recently that said that shale gas production shot up 600% last year in China, but it’s still from a very small base, only 200 million cubic meters.  The target for 2015, which is just next year, is 6.5 billion cubic meters.  It’s really a lot to expect China to meet those targets.

3.  What are the forecasts for Japan, given its total dependence on energy imports?

Japan saw a great disruption to its energy supplies following the Fukushima nuclear accident in March 2011.  Since then, they’ve had to import more fossil fuels, a lot more LNG, wood, and coal.  We anticipate that, in accordance with the policies of the current government under Shinzo Abe, Japan is going to gradually try to bring back those nuclear plants.  We think that in the end that many of the nuclear plants that have been mothballed will have to be put online again in order for foster economic growth, but this has proven very difficult politically.  We will therefore continue to see a high degree of fossil fuel dependence.  Because the nuclear plants that were shut down, its imports such as coal, oil and LNG have increased, so we are likely to see that situation continue for some time.

Japan reneged on its emission reduction targets in recognition that, while some nuclear plants will come back on line, some never will.  Unfortunately for Japan, it is very heavily dependent on energy imports because it has few natural resources of its own.

4.  What impact will the expansion of US oil and gas production have on developing suppliers in sub-Saharan Africa, such as Angola, Nigeria, and Mozambique?

We’ve already seen impacts on exports from African countries to the US, and as the shale oil revolution continues in the US, you are going to see those impacts.  The natural reaction of those African countries is to look to other markets, probably in Asia.

The most severe impacts of the reduction of US dependence on crude oil imports has not been on Middle East oil producers, but more on exporters from West Africa and also Algeria.  If you look at the direction of oil trade figures in terms of volume, suppliers such as Nigeria, Angola, and also Algeria have seen their exports to the US fairly substantially cut, so they will have to find replacement markets elsewhere.  The obvious destination for that crude oil is markets in Asia, especially China.  In the longer term eventually, if the US maintains lower levels of oil import dependence–which is what we are forecasting—eventually you will see impacts on Middle East OPEC exporters as well.

The most direct impacts of the reduced US oil dependence has been on West Africa exporters, mainly because of the kind of oil produce is the kind of light, tight oil that we are seeing produced in greater volumes in the United States.

5.  How will LNG exports from Russia compete with US, Canadian, and Australian supplies? 

All of those are going to want to focus on the Asian market.  The situation in Russia is that most of its gas exports have been directed to a pipeline to Europe.  As with oil, the growth market in terms of consumption for gas will be Asian markets.  Since there have been new suppliers, and suppliers that have scheduled to rapidly increase their capacity in recent years, such as Australia, and the likelihood that North America will start to be an LNG exporting region as well, you are starting to see Russia look towards the Asian market as well for both pipeline and LNG exports.  There  is already is one terminal from which Russia exports LNG in Sakhalin and that goes to Asia.  It’s small in terms of total volumes.  There is another LNG project that is just being sanctioned, and that’s Yamal LNG which is intended to supply both Europe and Asia.  There are another two which could get sanctioned over the next couple of years.  Russia is realizing that if it doesn’t get on the “LNG train” so to speak, it may miss out on its ability to capitalize on the growing Asian market for gas

There has been a reorientation of Russia’s gas export policy.  Gazprom will no longer have its monopoly on gas exports.  There have been some tax concessions that have been given for Arctic offshore development which would include gas, but the sanctioning of the Yamal LNG project is quite significant as it indicates that Russia sees one of its future intensive growth demands for its gas will be in Asian markets, and that includes LNG.

6.  Why do you feel that the US is better placed than Canada for long-term LNG exports? 

Both Canada and the US have these large shale gas resources.   Canada has 573 Trillion cubic feet, and the US has 665.  Both are going to try and capitalize on those resources and ship LNG to Asia.  They both have their own advantages.  Canada is a little closer to Asian markets.  In our judgment, the infrastructure in the US is just closer to being in place:  its import facilities can be converted into export, and you’ve got a more developed pipeline network.  In both countries, there are some pretty big regulatory hurdles which will cause questions in the minds of investors.  The advantage for the US is that its LNG won’t be oil-indexed, so it priced off US natural gas prices, which are currently very low compared to what LNG costs in Europe and even more so to what it costs in Asia.  So the advantage is that LNG from the US is likely to be much cheaper than what could be gotten elsewhere from others exporters that index their price of LNG to oil prices, which are still fairly high.  There is a certain price advantage, even if you take into account the cost of production and transport to the Asian markets, which Asian consumers can take advantage of.

At the same time, there is concern that Australia will get there first and carve out a share of the Asian market.

7.  Will the US government legislate for crude oil export this year, and if not, when?

There has certainly has been growing clamor from some in the industry for exports to be allowed, at the moment they are not allowed generally.  At the same time, there is going to continue to be reluctance on the part of government.  Those IEA figures that came out yesterday showed that demand in the US is also growing even as its supply is.  That implies that official reluctance is only going to be strengthened.  There is already a lot of debate over whether the US should be exporting LNG or whether it should just keep its gas supply for the domestic market.  The export of oil is allowed under certain circumstances, but to open it up for general export would raise issues of energy security.

8.  Are you skeptical regarding China’s new provincial-level approach to reduce air pollution that was released recently?  Do you think these measures will have much impact?

It’s one of those situations where the glass could be considered half full or half empty, depending on how you look at it.  It’s definitely a step forward.  You’ve got 11 provinces out of 31 that are now obliged to reduce PMT.5 by a certain percentage, which varies on the province, by the year 2017.  “PMT.5” measures small particle pollution.

The other provinces will be judged based on their PM.10 reduction, which deals with larger particles.  From a human health standpoint, it’s a positive development, when you bear in mind that perhaps half a million people each year die in China due to air pollution.  But even the very ambitious PMT.5 cuts that they’re talking about in the case of, say, Beijing, which is committed to reducing its PMT.5 by a quarter, will only bring Beijing to double the legal limit that exists in the US.  Even so, China has still got to achieve these new targets; the current ones have been ignored quite a lot in the past.  Doing so will require strong national oversight and it’s not really clear that you’re going to get that, although the public pressure is certainly getting stronger.  If you ask what they means for coal producers, for example, it’s a sign that figures such as 10% coal consumption growth which we saw in recent years are behind us.  Although coal consumption growth is currently edging up slowly, it will begin to taper off later in the decade.

Current coal consumption levels in China are clearly unsustainable.  Even though it has contributed to its vast economic growth, it has also contributed to its air pollution and emissions problems.  There is a little bit of a tug of war there between the vested interests behind China’s emission standards.

Even before China came up with more concrete measures recently, it had stopped granting approvals for new coal-fired plants in the East of the country.  Certainly coal is recognized as a big problem, but not so much for reasons related to climate change, as for to the problems with health effects due of air pollution, such as lung cancer rates which have risen a great deal in Beijing.

9.  Can you provide some more information on China’s key role in non-hydro renewables? 

China has pursued a fairly aggressive policy since the mid to late 2000s on non-hydro renewables, starting with wind power.  It has set some very gung-ho targets with respect to installation, more recently doubling its target.  We’ve seen a surge of investment into manufacturing capacity, we’ve seen a lot of installations going up, but over capacity has become a problem.  You’ve also got problems such as installations that aren’t hooked up to the grid, and even if they are hooked up to the grid, they are underutilized because the grid doesn’t like taking all of this inconstant renewable power.  The policy makers have been trying to find an answer to that, and continuing to up your targets is one approach.  The benefit to the rest of the world is, although China has come in for a lot of criticism for giving state support to the industry through subsidies, production has greatly increased for wind power and solar, (although in the case of solar its due to a large part to European subsidies), and that has driven down the price of solar panels and wind turbines.

This concludes the webinar, the one I will post tomorrow will be on the telecoms industry.  



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