Speed and scale of the fall in energy investment in the first half of 2020 is “without precedent,” the IEA said, as the pandemic caused an unprecedented destruction in energy demand, disrupted supply chains for the construction of new projects and made companies reign in spending.
The largest effects on investment spending in 2020, especially in oil, stem from declines in revenues and uncertainty about the speed of recovery in the years ahead.
Oil (50%) and electricity (a further 38%) were the two largest components of worldwide consumer spending on energy in 2019. However, the IEA’s latest estimates see spending on oil will plummet by more than $1 trillion in 2020, while power sector revenues drop by $180 billion. This would mean an historic switch in 2020 as electricity becomes the largest single element of consumer spending on energy.
“The revisions to planned spending have been particularly brutal in the oil and gas sector, where we estimate a year-on-year fall in investment in 2020 of around one-third,” IEA analyst said, noting this “has already triggered an increase in borrowing as well as the likelihood that restrained spending will continue well into 2021.”
The power sector has been less exposed to price volatility, and announced cuts by companies are much lower, but we estimate a fall of 10% in capital spending. In addition, sharp reductions to auto sales and construction and industrial activity are set to stall progress in improving energy efficiency.
Investors keep focussed on China, turn away from the U.S.
Despite the pandemic, China remains the largest market for investment and a major determinant of global trends; the estimated 12% decline in energy spending in 2020 is muted by the relatively early restart of industrial activity following strong lockdown measures in the first quarter.
The United States sees a larger fall in investment of over 25% because of its greater exposure to oil and gas. According to EIA figures, around half of all US energy investment is in fossil fuel supply.
Europe’s estimated decline is around 17%, with investments in electricity grids, wind and efficiency holding up better than distributed solar PV and oil and gas, which see steep falls.
Developing countries, especially those with significant hydrocarbon industries, see the most dramatic effects of the crisis, as falling revenues pass through more directly to lower funds for investment.
Fracking companies feel the pinch
The cuts in fuel supply investment in 2020 apply to all types of resources and company, but a few elements stand out.
“Some of the most dramatic cuts in the oil and gas sector – in many cases above 50% – have been among highly leveraged shale players in the United States, for whom the outlook is now bleak,” IEA analysts said, although it is too soon to write off shale as a whole.
Funds available to some indebted and poorly performing national oil companies (NOCs) have also dried up, as governments scramble to make up for acute shortfalls in revenue.
Further downstream, a surge in investment in LNG left the sector facing a major overhang of capacity, putting intense pressure on margins and pushing back many investment plans and timelines. “Natural declines in upstream fields offer a hedge against overinvestment, but there is no such protection further down the value chain against demand coming in below expectations,” analysts noted.
Stagnant spending on gas power, rise in RES
In the power sector, many state-owned utilities have shelved investment while larger renewables-focused utilities in advanced economies “appear on firmer footing,” analyst noted, “but also face some revenue risks from shifting market demand and price trends.”
Overall, ongoing investment in renewable power projects is expected to fall by around 10% for the year, less than the decline in fossil fuel power. The crisis is also prompting a further 9% decline in estimated global spending on electricity networks, which had already fallen by 7% in 2019.
Alongside a slump in approvals for new hydropower and nuclear power units this decade, stagnant spending on natural gas plants, and a levelling off of battery storage investment in 2019, “these trends are clearly misaligned with the needs of sustainable and resilient power systems,” analysts pointed out.
The share of energy investment in GDP has declined and is set to fall to under 2% in 2020 – down from around 3% in 2014 in what the IEA calls “worrying signs” for an economic downturn.