Milan – October 15th, 2019
On October 15th, the annual event of the Component Manufacturers chapter of the Italian Association of Plant Engineering (ANIMP) took place in Milano, with the active participation of SupplHi. The annual event gathers about 350 professionals from Plant Engineering community – Contractors, components manufacturers, service providers and Universities active in the industry.
SupplHi presented the Energy Industry Global Markets Forecast 2019 – for the 4th year in a row – in collaboration with leading international EPC Contractors and turbine manufacturers. This year the 110 page market study saw contributions from ANIMP, Ansaldo Energia, Baker Hughes, Bonatti, Maire Tecnimont, Siirtec Nigi, Saipem, SupplHi, TechnipFMC and Wood.
The presentation was delivered by Mr. Daslav Brkic, Business Development Consultant, and by Mr. Giacomo Franchini, Director of SupplHi, where it was followed by the annual roundtable with CEOs, Business Development and Sales Managers of leading Contractors.
“The Oil&Gas and Power markets are there, with moderate optimism and the supply chain has an overall good backlog.” stated Giacomo Franchini “However, the industry has new priorities, some confirmed and that became real like the need for the continued CAPEX efficiency, the creation of Local Content, the standardization of equipment specifications and processes, an increased focus on the sustainability aspects and on digital innovation. Other priorities are emerging, including the need for more specialization among players, new Green value chains including hydrogen, a renewed focus on Project Management, the need to attract new talents and to be industrially relevant at a national and global level.”
The Report is facilitated through 3 chapters: Market Context, Outlook on Investments, and Impact on the Supply Chain.
Global energy investments stabilized in 2018 versus 2017 at 1,8 trillion USD and are expected to grow gradually over the next few years. This is mainly due to the growing world economies that drive higher energy demand in spite of gradually lower energy intensity.
However, approvals for new projects fall short of what would be needed to meet continuous energy demand growth, where there are few signs of the substantial reallocation of capital towards energy efficiency and cleaner supply sources.
Five key elements frame the market context:
1. Demand growth for liquids to flatten: for most future increase for petrochemicals, maintaining efficient production to be key future challenge. In the near future, many (but not all) operators expect a flat oil price at approximately today’s levels – but with significant uncertainties.
2. Declining investments in coal-fired power plants, but coal usage remains high, particularly in Asia. A flattening consumption of coal is not expected before 2035.
3. “Gas is King”. It has been the largest driver of energy-use growth in 2018 and to become the single largest energy source. This is also confirmed by the growing importance of LNG in international gas trade where big LNG exporters will all increase their production. In fact, 2019 has been a pivotal year for new FIDs in LNG and new countries (e.g. Bangladesh, Panama, Gibraltar, …) are choosing to import LNG for various benefits. Gas is also opening up a new market segment: direct use of LNG as clean transportation fuel.
4. The energy transition is unstoppable and renewables will continue to grow rapidly. In a McKinsey Energy Insights’ Global Energy Perspective scenario, post 2035, renewable power generation will account for more than 50% of total power supply – a clear break from historic fossil fuel-based generation. Global carbon emissions are to peak in 2024 and fall by -20% by 2050, primarily driven by a reduction in emissions from coal but still not sufficient to achieve the 1.5° or 2° C goal. In fact, more emphatic efforts are needed to accelerate the transition to minimum carbon. A more radical view of the energy future is provided by DNV GL that depicts primary energy demand to peak around 2030, then fall. However, current investments in energy generation are insufficient – under any future scenario.
5. The recent year has seen a big change in ‘sentiment’ towards decarbonization and energy savings. This is mainly due to: growing awareness of Climate Change consequences, management incentives for climate targets in major companies, general consensus towards the need for Circular Economy and investor pressure on key industry players. However, the pace of change is impossible to predict. In this context:
- the photovoltaic cost reduction should continue through the ‘experience curve’ and Floating photovoltaic will become reality in Asia/Pacific
- Energy storage as a new frontier with power storage utilization to grow rapidly and become commercial reality
- Globally, a fast uptake of electric vehicles for passenger and commercial use (e.g. China as a leader in e-buses adoption) assisted by huge investment in e-charging infrastructure
- More widespread hydrogen utilization to depend on improved electrolyzer economics with many possible development directions
As a conclusion, barring geopolitical difficulties, traditional investments into the Oil&Gas industry will grow in the medium term – then will plateau. Most longer term opportunities will be in new energy markets like hydrogen. In all cases, there is a perception of under-investment, and uncertainty remains paramount.
OUTLOOK ON INVESTMENTS
In the 2014-2018 period Capital Expenditure (CAPEX) showed a high correlation with Oil prices while 2018’s temporary drop did not affect the awarding of projects. The graph below illustrates the awards excluding Exploration and Drilling CAPEX and just focusing on Plant Engineering’s equipment and services.
In Upstream Oil&Gas, a continuous soft spending recovery is expected due to the new CAPEX continuously required to maintain the production in a “CAPEX efficiency” context. The time-to-market is driving a shorter lead time in projects, however the market is registering volatility and uncertainties on project sanctioning and FIDs dates in Offshore. The global Decommissioning backlog is piling up due to the ongoing production shut-ins. Offshore Wind Capacity will experience high growth and 72% of future Offshore Wind capacity will be exposed to Local Content policies.
In Midstream Oil&Gas, the US is expected to overtake Qatar and Australia in LNG Liquefaction capacity, with limited relevance – compared to expectations of a few years ago – of Floating LNG solution. In 2019 – a record year for FID’s in LNG Liquefaction – Africa took the lead in record-year awards for Liquefaction projects, with more awards expected in 2020 and new tenders, especially in Qatar. On the demand side, China and India are doubling their LNG import infrastructure in 5 years. In terms of Onshore Pipelines, the demand in North America is still present with strong Local Content requirements.
In Downstream Oil&Gas, the Refining segment is expected to growth at a slow pace. This is due to a combination of elements: the annual refined product growth from 2020 to 2030 is expected to peak at 0,6%; in Europe, the conversion to “Green refineries” continues but at a slow pace; the investments to comply with IMO specifications on Marine Fuel Oil are below expectations with the shipping industries investing in scrubbers used in the ships; the acceleration of the Petrochemical demand will be partly mitigated by increasing environmental pressure to reduce Petrochemical usage; the progress of integrated Refinery-PetChem complexes is experiencing a slowdown due to consolidation of players and market uncertainties.
The plateau in refined products demand growth is causing many refining companies to evaluate their Petrochemical strategy. The consumer demand is boosting Chemicals production growth that will rely on Oil&Gas where Ethylene, propylene, methanol and paraxylene show the strongest growth in current up-cycle conditions. In terms of Polypropylene plants a wave of investment is expected, with China still driving the growth while the Polyethylene industry has enjoyed tremendous growth during the last couple of years, driven also by historical high margins.
New investments in Fertilizers’ plants are experiencing a growing demand driven by the increasing food consumption, the improving agricultural practices in emerging markets, changing dietary food patterns and the strong demand of urea in technical applications. As a consequence, an acceleration of plant capacity additions is expected between 2021-2022, followed by supply and demand rebalance.
In Power, FIDs for new coal power declined again and approvals remained at low levels for Nuclear and Hydro. Spending on digital grid technologies has continued to rise, while Gas fired plants confirmed their essential role in the new market scenario. In fact, gas fired plants are essential for grid restoration to support the deployment of renewable power generation that creates technical and economic challenges for grid operators, power generators and investors.
IMPACT ON THE SUPPLY CHAIN
While the Market is confirmed to be there, with moderate optimism, the industry has 10 priorities, some confirmed and that are becoming “real”, combined with other priorities that are emerging:
1. CAPEX Challenge: costs must remain under control, efficiency is a must because current levels are what the market is able to pay to support the award of new projects.
2. Local Content: as in the ADNOC’s case, it is a factor that makes companies win or lose contracts, with LC regulations that differ from country to country, requiring tailored approaches.
3. Standardization: Standardization is an innovation being driven by Clients, as in the case of JIP33 that has the objective of standardizing the specifications used for procuring equipment, and enabling the supply chain to become better, faster and cheaper at delivering to their customers. Fast adopters and contributors to the new standards will be the ones benefiting the most.
4. Sustainability: Environment, Social, Governance (ESG) principles, practices, standards, metrics and requirements are becoming an award factor in tenders, are entering the Banking system. Sustainability is a pass-through to the entire value chain, repeating the case of “Quality systems”, 30 years later.
5. Digital innovation: Digital innovation – in Schumpeter’s definition a process of creative destruction that revolutionizes the economic structure – has not been performed yet. All the largest players are utilizing very similar Digital Programs, with small incremental improvements, while the digital wave will be much more intense and will change our industry, displacing the non-innovators.
6. Specialization: A reverse back to specialization in a very competitive market because company specialization means complementarity. Furthermore, businesses will be re-defined to focus just on differentiating “core” and outsourcing what is not differentiating to shared service centres able to balance workload of the entire industry (and cross-industry).
7. New Green industry: creating new opportunities and new values chains like in Green Chemistry and Hydrogen. Opportunities are also in the infrastructure required to support the “core”..,
8. Project Management: the supply chain will be increasingly local and shared, specs will be standard, Support activities will be outsourced, execution will be even more decentralized and decisions will move faster. In this context, Project Management to become a differentiating factor.
9. New Talents: current and new Talents are more and more required in the Energy industry. Generation Z will be looking for businesses with: a purpose (other than making money), entrepreneurial values, continuous self-education, meaningful interactions and a new concept of network with personal and relatable communication and International exposure.
10. Be industrially relevant: the industrial world has a strong effect on GDP and a very long supply chain but typically low exposure to policy makers – this trend will be required to be reversed in the coming years also to sustain an increase in R&D by the industry.
The full Report can be downloaded at the following link: