Energy trends to watch in 2019
INSIGHT ARTICLE |
Innovative technology is changing the way businesses are managed, and the energy sector, while not leading the way, is nevertheless seeing an increase in the use of artificial intelligence, telematics and big data to lower costs, streamline operations and enhance safety. However, with increased access to information afforded by technology comes the risk that unauthorized parties could gather data as well.
In addition, market forces and regulatory rollbacks are seeking to balance environmental protection with the need for sustaining and growing industry sectors. Petrochemicals and export opportunities represent the largest potential for growth, but alternative energy sources—led by bioenergy—are expected grow as well.
Following are highlights of some trends to watch in 2019:
Artificial intelligence and robotics
From well head to burner tip, the energy industry’s efforts to adopt innovative technology has been driven largely by rising costs and changing prices. Evolving price climates, for example, have seen the price per barrel of crude on a roller coaster ride, going from about $35 in January 2016 to $60 in November 2018. This volatile environment has pushed the industry to find innovative ways to reduce production costs and keep margins relatively stable.
Human resource constraints are another factor pushing the industry towards innovation. Artificial intelligence and automation are filling in the gaps left by a workforce that moved on when energy prices fell to dramatically low levels in late 2014. Geography is also playing a role. Telematics, the long-distance transmission of digitized information, is being used to troubleshoot equipment and monitor production status. Remote monitoring is being used to save time and expense by reducing travel.
Moreover, AI and machine learning can help improve outputs for oil and gas production by optimizing well design and carrying out preventative maintenance. For clean and alternative energy, AI can help boost output of renewables and better integrate distributed renewable energy sources into the grid.1
The benefits of technology integration are clear and substantial: The average time spent drilling a new oil or gas well has dropped to as little as 12 days, down from an average of 32 days, depending on the basin.2 The International Energy Agency estimates that widespread use of digital technologies could decrease production costs between 10 percent and 20 percent and boost recoverable oil and gas resources by about 5 percent globally.3
Technology is enhancing safety in the industry as well. In offshore drilling, rather than use tethered equipment that required operators to be physically present on the platform or drill ship, companies can install next-generation robotics that allow operators to be onshore. On a smaller scale, automation and other technology are increasing safety for coal production as well.
The impact of cybersecurity
In June 2017, the United Kingdom’s National Cyber Security Centre issued a warning to the country’s energy companies that a number of engineering and services organizations had been compromised by unauthorized access. Had the attack not been thwarted, well-supported hackers could have caused significant disruption to the U.K.’s power grid. This was the case in 2015, when hackers disabled large parts of Ukraine’s energy network, leaving nearly a quarter of a million people without heat in the middle of the Ukrainian winter.4
Clearly, the stakes are high for energy companies in a cyberwar. Hackers breaking into energy company systems can do damage beyond the company’s firewalls—they can take down regional or even countrywide power grids. Turbines can be made to overheat or shut down; pipelines can be forced beyond their standard compression levels to cause harm and disruption. A joint technical alert from the Department of Homeland Security and the Federal Bureau of Investigation in March 2018 warned of Russian government actions targeting organizations in the energy, nuclear and commercial facilities, among others.5
Despite these risks and the level of automation that energy companies employ, the industry is not on the bleeding edge of cybersecurity. While energy companies are increasingly focused on implementing proactive cybersecurity strategies, headwinds may be preventing them from being where they need to be in protecting themselves from a cyberattack.
Low oil prices have put a burden on investment in cybersecurity across the industry. Coupled with the reduction in workforce over the last several of years, the progression to technology and security maturity ratings that most middle market energy companies hope to achieve has been reduced. Oil prices also have forced energy companies to move information to the cloud to take advantage of commoditized services to manage their infrastructure. But companies need to be aware of the risks involved, even in the cloud environment, and it’s important to establish protocols and processes to mitigate those risks.
Historically, information and operational technologies have operated in silos in the energy industry. But when IT and OT converge, company management has access to real-time data that allows for better decision making. The biggest challenge is intraconnectivity: OT environments typically are not connected to corporate environments or even to the intranet. While convergence is changing this dynamic, the new access to information also increases the need for greater security.
Regulations and market forces
In the past two years, a number of proposals promoted rolling back energy industry regulations, including proposals to replace the Clean Power Plan and the easing of some modern pollution control policies. The American Petroleum Institute has said that its members (including U.S.-based Exxon) have reduced emissions of methane gas—a major component of natural gas—on their own and that further regulations in this area are unnecessary and costly. The group pointed to a report by the Environment Protection Agency noting the decrease in methane gas emissions by 28 percent since 1990.6
But the midterm elections brought with them a number of energy and environmental initiatives that voters around the country want the 116th Congress to address. Nevada voters, for example, approved requiring electric utilities to get 50 percent of their power from renewable sources by 2030. Some governors-elect are pledging a goal of 100 percent renewable energy for their states, while others are promising a renewable energy strategy and the reduction of greenhouse gas emissions.
Some proposals—to increase renewable energy usage or impose a carbon tax on emissions, for example—failed at the ballot box. In Colorado, a proposal to increase a mandated setback distance from occupied buildings for new oil, gas and fracking projects was defeated. One month later, however, the Colorado Oil and Gas Conservation Commission voted unanimously to measure setbacks from property lines rather than the buildings themselves, effectively increasing the requirements as set forth in the original ballot. Alternative energy initiatives favored by certain states should drive many state jurisdictions in the coming months and years to work on infrastructure improvements, efforts that will require a great deal of resources and time.
Regulators, industry associations and environmental groups are expected to continue to confront each other over these proposals. While rolling back some regulations for the industry could make it easier to, say, bring more products to market and lower costs, these benefits could be surpassed by market forces. Oversupply, low oil prices and demands for cleaner energy could do more to determine the outlook for energy production than the easing of regulations. Alternatively, capturing and reselling methane gas emissions could be a nearly $200 million annual revenue stream.7 Clearly, a balance needs to be made between sensible, cost-effective regulations and protection of public health.
Petrochemical expansion and commodity exports
The U.S. Energy Information Administration estimates that U.S. crude oil production will average 12.1 million barrels per day in 2019, up from 10.9 million b/d in 2018. The EIA notes that dry natural gas production, on both the level and growth of production in 2018, established new records. The agency expects natural gas production will continue to rise in 2019 to an average of 89.6 billion Bcf/d, up from an average 83.2 Bcf/d in 2018.8
The EIA expects total U.S. coal consumption in 2018 to fall to 691 million short tons, the lowest level since 1979, mainly driven by declines in coal use in the electric power sector. Natural gas prices continue to stay relatively low, making it a cheaper, cleaner-burning electricity generator than coal.
The enormous stores of natural gas in the United States will be serving as the source for petrochemical-based products from Styrofoam to car components to cosmetics. With the pipeline infrastructure already in place, and with the expansion of the Panama Canal and talk of dredging the ports in Corpus Christi to handle today’s large crude carriers, exporting will be easier through the Gulf of Mexico, as energy companies serve markets in regions such as the Pacific Rim, India, China and South America, where a growing middle class is driving the demand for crude oil and LNG.
The modernization of NAFTA (or the USMCA) could allow U.S. energy companies access to Mexico, enabling them to start drilling and building out infrastructure in that country. This remains to be seen, as Congress and legislators in Mexico and Canada still need to sign off on the agreement. If passed, the new laws governing trade could force companies to pull production—especially those petrochemical-based car parts—out of China and into North America.
Renewable and alternative energy
As costs continue to come down and technology improves, energy companies are investing in renewables such as solar and wind power as they endeavor to transition to clean energy sources. But it turns out that the largest shift is going to be from oil to natural gas. The International Energy Agency expects global oil consumption to peak no sooner than 2040 and, at that point, we will see a shift to natural gas. Qatar, for example, plans to expand its capacity for liquefied natural gas by more than 40 percent over the next decade.9
One of the challenges stifling growth in alternative energy is battery storage, which until recently has been a low-capacity, high-cost enigma to unravel. But the use of stationary batteries in commercial and industrial sites has been increasing as costs fall—as far as $100 per kilowatt hour by 2020 from a high of $1,000 in 2010, according to McKinsey & Company.10 This could set the stage for distributed battery installations in homes and businesses to expand by as much as 50 percent a year, a rise in front-of-the-meter storage that could outpace its behind-the-meter counterpart. This, in turn, could help bring down the cost of electric vehicles.
One often-overlooked renewable resource has been bioenergy, which accounted for half of all renewable energy consumption in 2017—as much as hydropower, wind and solar energy combined. Bioenergy is expected to lead renewables consumption growth for the next five years, but it is not without its challenges.
Nevertheless, for the near term, demand for crude oil will continue to grow while abundant low-cost natural gas drives growth across petrochemical products. For the long term, technology disruptions, electric vehicles and a shift to natural gas will eventually cut the demand for oil.
2Siegel, H. “Bakken 5-Year Drilling & Completion Trends” (2013) DTC Energy Group.
3Digitalization and Energy 2017, International Energy Agency.
4Cook, J. “How Russian Hackers Almost Shut Down UK’s National Grid on Election Day” (Nov. 3, 2018) The Telegraph.
5Alert (TA18-074A) Russian Government Cyber Activity Targeting Energy and Other Critical Infrastructure Sectors, (March 15, 2018) United States Computer Emergency Readiness Team.
6Silverstein, K. “Oil Companies Vow to Cut Their Methane Emissions” (Nov. 28, 2017) Environmental Leader.
7Silverstein, K. (Nov. 28, 2017)
8Short-term Energy Outlook (Nov. 6, 2018) U.S. Energy Information Administration.
9Bousso, R., Nasralla, S., “Natural gas here to stay beyond energy transition, Big Oil says” (Oct. 9, 2018) CNBC.
9Frankel, D., Wagner, A. “Battery storage: The next disruptive technology in the power sector” (June 2017) McKinsey & Company.
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