Investments are leading indicators of the direction of change in the energy sector. This is particularly true for investments in innovation and digitalisation, so-called “intangible assets” that will shape the technologies for supplying and using energy in the decades to come.
Across the economy, investments in long-lasting intangible assets – including software, R&D, data, management efficiency, branding – are growing and will be among the biggest sources of future productivity. In Europe, intangible investments are rising as a share of GDP, while those in more traditional, tangible capital assets are declining. In the United States, intangibles are already in the lead according to some estimates.
The International Energy Agency brings together the best global data on energy investments in its World Energy Investment report and Tracking Clean Energy Progress web platform, including investments in innovation.
Innovative energy technologies will be crucial to tackling environmental problems associated with energy use, as well as reducing consumer costs and increasing prosperity around the world. Both the public and private sectors play central roles in driving energy innovation, with private money flowing to new commercial opportunities, supported by government-backed markets that provide direction to innovative activities and government investment in novel, risky technology areas. To deliver the goals agreed by the 23 country signatories (plus the European Commission) of Mission Innovation, understanding the trends in the spending and the strategies of the private sector will be vital.
Electric mobility is leading an energy venture capital boom
The latest data on investments in start-ups from i3 shows a booming venture capital sector globally for energy technologies. Venture capital investors provide capital to multiple small companies with new ideas about how to deploy energy technologies, often combining technologies in novel ways in the hope of disrupting existing markets and delivering huge returns within five years if one of them is successful. While venture capital generally does not fund the underlying research, it is a good indicator of where people think there is scope for new technologies to meet customers’ unsatisfied needs and unseat the existing energy order.
Venture capital investment in energy technologies is flourishing, with more money flowing in 2018 than in the first two quarters of any previous year. But whereas the previous highpoint in 2008 was led by renewables – notably solar – it is now transportation that is getting all the attention, mostly electric vehicles. To complete the switch from supply-side to demand-side technologies, funding for energy efficiency (especially related to connected-buildings technology) has been higher than for renewables so far in 2018.
As we have previously noted, several factors underpin this trend. First, innovation in clean energy hardware and venture capital are often not well matched. The timeframe needed to establish the viability of energy projects can be too long, the capital requirements for technology demonstration too high and the consumer value too low. Although there is a much more established market for solar panels today, compared to 2008, there is a still a serious need to deliver better renewable technologies to the market. Secondly, while the upswing of investments is striking, the total number of deals was actually falling until this year, when it saw an 18% increase compared to the first half of 2017. What has changed is the willingness of investors – especially in Asia – to place a small number of very large bets on electric vehicle companies, which represent the hottest part of the market today.
Energy is still far from joining the ranks of biotechnology and software as a hundred-billion-dollar venture capital market. However, by combining spillovers from rapid digital technology advances with expectations of revolution in the transport system, it is currently in a growth phase. If consumers respond favourably, some of these digital and mobility ideas could be deployed at scales of millions of units relatively quickly; at such a scale new generations would be developed each year and performance improved dramatically. But is unclear whether the excitement around, for example, batteries for electric mobility could stimulate venture capital investment in electricity storage for the grid or whether venture capital will play a significant role in energy supply technology development. Markets for stored electricity are not poised to deliver such high returns in the near term and venture capital is not usually patient.
Changes and new entrants in corporate energy innovation strategy
Corporate venture capital can take a slightly more long-term view, but still more short-term than traditional corporate R&D programmes. High levels of technological uncertainty in today’s energy sector, coupled with rising competition between firms in different regions and, increasingly, different sectors, support a shift in the patterns of corporate innovation funding.
We estimate that global corporate spending on energy R&D grew 3% in 2017, to USD 88 billion, but is still lower than it was in 2014, before the oil price slumped. Over recent decades, these budgets have become less centralised and more integrated with product development in individual business units. Many major companies devote no more than one-tenth to one-third of their total R&D budgets to new technologies, with the bulk of spending going to incremental improvements of existing technologies. Given the high expectations for fundamental changes in the energy system and uncertainty about the timing and technologies involved, firms are trying to make their research budgets work as hard as possible.
Digitalisation, in particular, enables companies to place more small bets on emerging technologies and to be open to changing direction quickly. New technologies for software and digital-based products have shorter innovation cycles and can be brought to the market quicker. They require less investment and fewer consumables, and they can be prototyped more quickly and tested in a variety of environments simultaneously and do not need costly manufacturing facilities or value chains to be deployed. The result can be a lower unit cost of innovation. But it also opens energy companies up to competition from firms with core competences in information and communication technologies (ICT).
In 2017, total investment in energy technology start-ups by corporations – i.e. companies primarily engaged in making and selling non-financial products – reached USD 6.1 billion. This was a big increase compared to 2016, and was driven largely by investments by ICT companies alongside more traditional energy sector companies, including oil and gas and utilities and automakers. As with energy venture capital in general, the overall trend underpinned by several very large deals, especially in Asia. Notable deals in 2017 included Tencent and Baidu’s investments in Tesla, NIO and WM Motors; Intel’s investment in Volocoptor electric helicopters; Qualcomm’s investment in CargoX truck logistics; and China Mobile’s investment in Ninebot electric scooters.
In some cases, the entry of firms from sectors such as ICT into parts of the energy industry is forcing companies to change their perceptions of who they should consider their competitors to be.
There are several reasons large established companies provide capital to early-stage technology companies. They might see it as a good investment on a purely financial basis, but more commonly it is seen as an investment in learning about a technology, acquiring human capital, and building a relationship with the technology owner that would smooth the path to licensing or buying the technology if it is successful. In general, this approach is used with technologies that are currently outside the core competence of the corporate investor but that could add significant value to existing businesses if the market developed in that direction. Given the value of innovation to many large energy companies, corporate venture capital (CVC) finance and even growth equity (a type of private equity investment) can cost less and involve less risk than developing a technology in-house. It can also shield the developers from the strict evaluations placed on internal R&D projects housed in existing business units. For a start-up company, a CVC investor can provide access to expertise and customers that can give it a better chance of maturing quickly.
Among oil and gas companies, a noticeable recent trend is a shift away from technology areas that complement their existing infrastructure – such as bioenergy, CCUS and fossil fuel supply technologies – and towards technologies that could complement their broader capabilities or let them explore new business areas. Utilities have also increased their funding of energy technology start-ups. Worldwide, they spent a record USD 0.7 billion in 2017, surpassing the previous high of 2013 and the tail end of the clean tech boom. Solar power, electricity storage and, to a lesser extent, smart-grid technologies have been the main focus of utility funding in recent years, but growth in 2017 was driven largely by transport technologies, which took one-half of the total, and wind power technologies, which took one-quarter.
As innovation evolves, the IEA is helping policies to adapt
A growing number of energy companies are separating the teams that are focused on innovation outside their core competences, and that could in some cases undermine their existing businesses, from the governance structures of typical corporate R&D. Rather than having large budgets for research linked to sustaining existing businesses, these teams generally pursue a wider range of innovation management activities, often with lower capital requirements. These activities include VC funding, internal innovation competitions, pilot testing of competing options and more strategic partnerships with firms outside their traditional sectors. To manage risks in highly uncertain and unfamiliar technology areas, collaboration with technology suppliers, customers or across business units tends to play a larger role than in traditional corporate R&D.
Changes to the ways that new energy technologies are developed and commercialised by the private sector can require changes in the ways that governments incentivise and track innovation. Having a strong ecosystem of research institutions and energy entrepreneurs can be more valuable than tax breaks and R&D funding for making a country attractive to a large company as a place to undertake novel projects. Absolute corporate expenditure on R&D may become less closely linked to the pace of corporate innovation in low-carbon technologies. The need to collaborate to rapidly test and scale up ideas can reduce companies’ incentives to create and defend in-house intellectual property. Policy makers may need to ensure that their national or regional policies also support the improvements to capital-intensive hardware solutions needed to tackle climate change. In these areas, patient government capital for higher-risk technologies could become even more vital.
The IEA takes this public policy challenge seriously and is strengthening its work on innovation around the world. For example, on 30 September 2018, we signed a Memorandum of Understanding with India on collaboration on clean energy innovation as part of our Clean Energy Transitions Programme. We are also enhancing collaboration with Brazil and other key partner countries. Through this programme, plus our ongoing close cooperation with Mission Innovation and our leading network of Technology Collaboration Programmes, the IEA aims to support countries to have the best data and analysis on public and private sector energy R&D at their fingertips and apply international best practice in policy making.
The commentary is based on an excerpt from World Energy Investment 2018 and interviews conducted with corporate R&D leaders in late 2017 and early 2018. Source: IEA
Crunching the numbers: Are we heading for an oil supply shock?
In the detailed energy model that underpins WEO 2018, new sources of oil supply steadily come online at the right time to meet changes in oil demand and keep the system in equilibrium. This smooth matching of supply and demand minimises oil price volatility, which is why our price trajectories in each scenario are smooth, and would likely be a desirable outcome for many of the world’s oil consumers (it could also be better in the long run for many of the world’s producers.
But commodity markets don’t work this way in practice. The oil price drop in 2014 led to multiple widespread impacts on markets, not least of which was that the number of new upstream projects approved for developments plummeted. With the rapid levels of oil demand growth seen in recent years, there are fears that supply could struggle to keep up, bringing with it the risk of damaging price spikes and increased volatility.
On the flip side, with shale production in the United States continuing to grow at record levels and increasing attention on executing upstream projects that can quickly bring oil to market, there are also arguments why a future oil supply “crunch” be safely ruled out. What does the WEO 2018 have to say on this matter?
Why invest in new supply?
The discussion about investment in oil projects typically focuses on the outlook for demand. But this is only a small part of the story – the main reason why new investment is required, in all our scenarios, is because supply at existing fields is constantly declining.
In the New Policies Scenario, there is a 7.5 mb/d increase in oil demand between 2017 and 2025. But without any future capital investment into existing fields or new fields, current sources of supply (including conventional crude oil, natural gas liquids, tight oil, extra-heavy oil and bitumen, processing gains etc.) would drop by over 45 mb/d over this period – this is known as the “natural decline” in supply. If there were to be continued investment into existing fields but still no new fields were brought online – known as the “observed decline”– then the loss of supply would be closer to 27.5 mb/d. A 35 mb/d supply-demand gap would therefore still need to be filled by investments in new fields in the New Policies Scenario in 2025 (there’s also a 26 mb/d gap in 2025 even in the demand-constrained world of the Sustainable Development Scenario).
Part of this 35 mb/d gap is filled by conventional projects already under development. There is also growth in conventional NGLs, extra-heavy oil and bitumen, tight oil in areas outside the United States, and other smaller increases elsewhere. In total these sources add around 11 mb/d new production between 2017 and 2025. Another portion of the gap would be filled by new conventional crude oil projects that have not yet been approved. Around 16 billion barrels of new conventional crude oil resources in new projects are approved each year in the New Policies Scenario between 2017 and 2025: these provide around 13 mb/d additional production in 2025.
This leaves around 11 mb/d. In the New Policies Scenario, this is filled by US shale liquids – also known as “tight liquids” – which includes tight crude oil, tight condensates and tight NGLs. Shale liquids production in the United States in 2017 was just over 7.5 mb/d. If investment were to have stopped in 2017, shale liquids production would have fallen by around 4 mb/d to 2025. However, we have seen that investment and production has actually soared over the course of 2018, and average production in 2018 is set to be close to 9.5 mb/d.
In the New Policies Scenario, shale liquids grow by another 5 mb/d to 2025 (i.e. total growth of 7 mb/d from 2017). So from 2017, and including the production to offset declines, US shale liquids provide the additional 11 mb/d production that is required to fill the remainder of the supply-demand gap. This would represent a huge increase in oil production: the growth between 2015 and 2025 would surpass the fastest rate of growth ever seen previously over a 10-year period (Saudi Arabia between 1967 and 1977).
If conventional investment doesn’t pick up…
It is worth looking in more detail at the assumption that 16 billion barrels resources are approved in new conventional crude oil projects each year from 2018 onwards. In the years since the oil price crash in 2014, the average annual level of resources approved has been closer to 8 billion. The volumes of conventional crude oil receiving development approval would therefore need to double from today’s levels, alongside robust growth in other sources of production, if there is to be a smooth matching of supply and demand in the New Policies Scenario.
What if this does not occur and annual conventional approvals remain at around today’s level? This would mean that some of the supply-demand “gap” would remain and another source would need to step into the breach. The most likely candidate to do so would likely be for US operators to increase tight liquids production at a much faster rate than is projected in the New Policies Scenario.
… then the US would need to add another ‘Russia’ to the global oil balance in 7 years.
In this case, US tight liquids production would need to grow by an additional 6 mb/d between now and 2025. Total growth in US tight liquids between 2018 and 2025 would therefore be around 11 mb/d: roughly equivalent to adding another “Russia” to the global oil balance over the next 7 years.
With a sufficiently large resource base – much larger than we assume in the New Policies Scenario – it could be possible for US tight liquids production to grow to more than 20 mb/d by 2025. However increasing production to this level would require a level of capital investment and a number of tight oil rigs that would far surpass the previous peaks in 2014. It would also rely on building multiple new distribution pipelines to avoid bottlenecks that could prevent or slow the transport of oil away from production areas.
What if demand were to follow a different trajectory?
In the Sustainable Development Scenario, with concerted action to reduce greenhouse gas emissions to meet the objectives of the Paris Agreement, demand peaks in the early 2020s and falls by 1 mb/d between 2017 and 2025. We do not yet see the policies in place or on the horizon that would lead to this outcome (if we did, they would be incorporated already in the New Policies Scenario), but it is of course possible that a lower demand trajectory also helps to avoid the risk of market tightening in the 2020s.
In the Sustainable Development Scenario, shale liquids, conventional NGLs and EHOB all grow from today’s levels in this scenario, albeit to a lesser extent than in the New Policies Scenario given a lower oil price. Filling the remainder of the gap would require approvals of around 8 billion barrels between now and 2025. This is very similar to the level seen over the past few years. This places the implications of “peak oil demand” in context. Even with a near-term peak and subsequent reduction in demand of around 1 mb/d by the mid-2020s, there remains a need to develop new upstream oil investments to fill the supply-demand gap.
Is nuclear energy essential for deep decarbonization?
The world is not on track to meet the target of the Paris Agreement to limit global warming to ‘well below’ 2°C. Participants at the Ninth International Forum of Energy for Sustainable Development (12-15 November 2018) in Kiev, Ukraine, deliberated on how nuclear energy could contribute to deep decarbonization. Today, some 450 nuclear power reactors in 30 countries provide about 11% of the world’s electricity. Nuclear energy is the world’s second largest source of low-carbon power, with about 30% of the total in 2015, and it displaces about 2 gigatonnes of CO2 every year.
Speaking at the Forum’s workshop on “Nuclear Energy and Sustainable Development: Role of nuclear in a decarbonized energy mix”, Ms. Yuliya Pidkomorna, Deputy Minister for Energy and Coal Industry, Ukraine observed that nuclear energy is the mainstay of energy infrastructure in Ukraine. Experts from Ukraine showcased nuclear energy’s contributions to the country’s achievement of the Sustainable Development Goals. Participants from United Kingdom and Canada presented national programmes in which nuclear energy contributes to deep decarbonization.
“A dialogue on the energy transition is incomplete without considering nuclear power”, said Mr. Scott Foster, Director, Sustainable Energy Division, UNECE in his opening remarks. “This is why the Forum has included nuclear energy on the agenda for the first time.”
Many countries have chosen to not pursue nuclear energy because they view that the risks of incidents or accidents at nuclear power stations are unacceptable. Other countries have determined that they will not be able to achieve their development objectives without deploying nuclear power. Many countries such as China, India and Russia are expanding their nuclear power base, while countries like Bangladesh, Belarus, Turkey and the United Arab Emirates are building nuclear power plants for the first time.
Advanced nuclear power systems incorporate passive safety features. Reducing costs through economies of scale and deployment of innovative small and medium reactors will have to be accelerated. Over fifty models of such reactors are under design and regulatory approval in different countries.
“Small and medium reactors are a possible game changer for nuclear power”, said David Shropshire, Section Head, Planning and Economic Studies, International Atomic Energy Agency. “They can be deployed by 2030 as a low carbon alternative, meet growing needs for potable water due to the climate change, and support remote and niche applications.”
“Today’s nuclear energy is the product of 60 years of innovation, supplying clean, affordable and reliable electricity on a major scale”, said Ms. Agneta Rising, Director-General, World Nuclear Association, summarizing the deliberations at the workshop. “To meet the growing demand for clean electricity, the global nuclear industry Harmony programme sets out a vision of 25% of global electricity supplied by nuclear by 2050 working alongside other low-carbon energy forms such as renewable energies.”
Deliberations on nuclear energy at the Forum intersected with discussions on renewable energy, energy efficiency, and fossil fuels and the need for finding the right mix suited for different regions and countries. Decarbonizing energy will require contributions from all low-carbon technologies.
The workshop was co-organized by World Nuclear Association and the International Atomic Energy Agency.
The impact of U.S. sanctions on Iranian oil industry, market in focus
Right from the day Trump withdrew from Iran’s nuclear deal, announcing his plan for cutting Iranian oil exports to zero, the oil scholars and experts all around the world begun contemplating the impacts of this decision on the Iranian oil industry especially on the country’s oil exports.
Today, near five months after Trump’s announcement and while the U.S. has re-imposed sanctions on Tehran, still nobody has a clear idea about the outcomes of the U.S. actions against Iran, and there is still great disagreement over the magnitude of the impact on Iranian oil industry and especially on crude exports.
However, the oil markets have been through various changes in the past few months based on which we can draw a relatively neat picture of what to expect in the future.
Markets moving toward ‘oversupply’
In January 2017 OPEC and a group of non-OPEC producers including Russia began cutting their output in order to balance an oversupplied market in which the oil prices had fallen from over $100 a barrel to under $30. After OPEC+ agreement the glut was slowly drained and the prices stared to move in an upward trend reaching $80.
The rise in oil prices started to concern Trump’s administration who were close to the midterm elections and also planning to re-impose sanctions on Iran; and the surging oil prices were not at all in line with their interests. This made Trump to begin pushing the U.S. allies in the Middle East to pump more oil in order to lower the surging prices.
In June 2018, led by Saudi Arabia as the biggest U.S. ally in the Middle East, OPEC and non-OPEC group agreed to restore some of their output to help rebalance the market which this time was considered “very tight”.
Afterward, despite the 2017 agreement, some OPEC members were allowed to pump at their maximum levels and also the world’s top three oil producers namely the U.S., Russia and Saudi Arabia, hit new production records.
Oil demand and a broken cycle
After pumping at their highest levels for over four months, Saudi Arabia and U.S. producers had to face the fact that there might not be enough demand for their oil in the markets.
The rising trade tensions between U.S. and China, rising interest rates and currency weakness in emerging markets have raised concerns about a slowdown in global economic growth and consequently in oil demand.
So getting back to the starting point [safe to say in a broken cycle], Saudi’s begun to believe that, once again, the markets were moving toward a glut and even with the cuts in Iranian output, the markets didn’t have the appetite for the new oil flows.
Consequently, in their latest gathering in Abu Dhabi, OPEC+, announced that the current situation “may require new strategies to balance the market.”
Gathered for their 11th meeting on Sunday, the OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC) announced that “the Committee reviewed current oil supply and demand fundamentals and noted that 2019 prospects point to higher supply growth than global requirements, taking into account current uncertainties.”
Following the meeting, Saudi Arabia announced its plans to reduce oil supply to world markets by 0.5 million barrels per day (bpd) in December, Reuters reported on Monday.
Iran sanctions and the exemptions
Facing resistance from Saudi Arabia for pumping more oil and pressured by high oil prices, the U.S. government had no choice but to soften their stance against Iran and let go of its “zero Iranian oil” dream.
So, just few days before OPEC+ meeting, when there were talks of a new strategy for cutting output, the U.S. government announced that it has agreed to let eight countries, including China, Turkey, South Korea, Japan and India to continue buying Iranian oil.
With the new waivers coming to effect, a significant amount of the cuts in Iran’s oil exports will be compensated.
The impacts on Iran’s oil industry
So far, affected by the U.S. sanctions, Iran’s oil exports have fallen from an average of more than 2.5 million barrels per day to around 1.5 million bpd in recent weeks.
This means currently near 1 million bps of Iranian crude oil has been wiped from the markets and Iran is currently selling a lot less than what it used to sell before the re-imposition of the sanctions.
So how big the effect of these cuts could project on the country’s economy?
First of all, the oil revenues envisaged in Iran’s current budget for Iranian calendar year 1397 (March 2018-March 2019) is estimated to be 1.01 quadrillion rials (near $26.5 billion) planned based upon $55 oil. This means under a $55 scenario, for this amount of oil revenues to be realized, Iran should sell 2.410 million barrels per day of oil up to March 2019.
What should be taking into consideration here, is the fact that since the beginning of the current Iranian calendar year (March 2018), average oil price has been at least over $60 and according to Reuters ship tracking data, Iran has been exporting 2.5 million barrels of oil and condensate on average during this time span, that is about 400,000 barrels more than what is expected in the country’s budget.
As for the current oil prices, according to the Reuters’ latest report on Sunday, after Saudi Arabia announced a decision for cutting their output by 500,000 bpd in December and considering the U.S. announcement regarding the waivers over Iran sanctions, oil is currently being traded at over $70 per barrel that is still over $15 more than the price based on which Iran’s budget is set.
Aside from the increase which is due to come from the resumption of purchases by the exempted countries, Iranian crude exports are also keeping steady with the demand staying strong in the EU. European buyers including Italy, France, Spain and Croatia continuing their intakes even after announcement of the sanctions.
This indicates that even at the current levels, and even without considering the barrels which are going to be back to Iranian oil exports due to the waivers for the mentioned eight countries, the U.S. sanctions are not having as a severe impact on Iran’s economy and oil industry as they were supposed to.
Let’s not forget the country’s ample domestic storage which can easily absorb the barrels that are not exported. Previously, when the U.S. and EU imposed sanctions on Iran, the country put almost 50 million barrels of crude and condensates on floating storage between 2012 and January 2016.
Meanwhile, the country’s refineries have also been picking up in the past few months. Iran’s gasoline production has surged 50 percent over the last 12 months, with further increases to come, according to the oil ministry.
In the end, considering the global supply and demand patterns, the trade tensions between the U.S. and China and with OPEC+ considering new cuts to be executed in 2019, as well as U.S.’ recent waivers over Iran sanctions, we can see that the odds are quite slim for U.S. sanctions having a significant impact on the Islamic Republic’s economy and its oil industry in the long run.
First published in our partner Tehran Times
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