US energy—Searching for opportunity amid uncertainty
The oil & gas (O&G) sector is no stranger to volatility, but it is even more at risk of instability at a time of unpredictable political situations, changing economic structures and broader global vulnerabilities.
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The US also benefits from private ownership of the minerals beneath a landowner’s property, a unique feature of the US O&G industry.
White & Case partner Micah Sadoyama (Tokyo), moderator of the seminar on US energy, opened by asking whether lower oil & gas prices are "the new normal" or whether prices of US$100 a barrel or more might be on the horizon.
Hideo Ushijima, joint general manager of the Structured Finance Department of Sumitomo Mitsui Banking Corp., played down those fears by suggesting that while hundred-dollar oil might occur as a result of a short-term shock, that price would be unsustainable over the longer term. Of far more importance are "large-scale shifts" that are taking place within the energy industry, Ushijima said.
The first shift, according to Ushijima, is the growth of technology in the renewable energy sector, including battery storage, along with growing electrification globally. Another is China's increasing move to clean energy and the impact of the growth of the nation's service sector, which consumes less energy than the country's traditional manufacturing sector. The final shift is the rise in resilience of the US shale O&G sector, which is having a significant impact on the global demand and supply situation, Ushijima said.
The importance of oil will gradually decrease in the coming decades, Ushijima said, as renewables gain ground, although demand will still be visible in emerging economies such as India and other nations in Asia.
Hendrik Gordenker, chairman of JERA Co., Inc., said that he sees little likelihood of instability on the demand side, although political issues, a trade war, sanctions or an economic downturn are inevitably going to affect the supply side. And given the state of the world, he said, it would be reasonable to expect volatility in the coming months.
Turning to the upstream industry in the US, White & Case O&G partner Jay Cuclis (Houston) said the shale "revolution" in the United States has cut domestic prices and turned the US into an exporter of liquefied natural gas (LNG), while a knock-on effect has been a spike in petrochemical projects. As a consequence of the robustness of the sector, Cuclis pointed out, private equity funds are now investing in upstream O&G projects in the US, changing market dynamics significantly. In addition, the new opportunities in US upstream projects have attracted significant interest from overseas investors. That trend is likely to continue for the foreseeable future, Cuclis said, as the sector in the US already has advanced infrastructure in place, including pipeline connectivity, and a skilled and experienced workforce. He added that the US also benefits from private ownership of the minerals beneath a landowner's property, a unique feature of the US O&G industry, because the interests of the landowners and the oil & gas developers are often aligned.
While there are suggestions that China might also be on the verge of large-scale exploitation of its shale The oil & gas (O&G) sector is no stranger to volatility, but it is even more at risk of instability at a time of unpredictable political situations, changing economic structures and broader global vulnerabilities US energy—Searching for opportunity amid uncertainty oil reserves, Cuclis points out that those reserves are in parts of the country that have very little water, a prerequisite for recovering shale energy reserves.
Gordenker said the accessibility of the US energy sector makes it appealing as an investment destination, while the emergence of shale energy has created "an entirely new benchmark" on pricing and is helping to create a genuinely global market.
Gordenker underlined that developed economies may look to replace traditional energy facilities that are reaching the end of their operational lives with renewables, which are "a very attractive package" to policymakers as well as a new generation of residents of megacities who do not want to live in heavily polluted metropolises. That change will take time, he admitted, and gas will retain a leading role until that happens.
Renewables are driven by tax incentives and renewable portfolio standards in a number of US states. Ushijima pointed out that while renewable energy sources still remain below the 10 percent threshold in the US market, growth of renewable energy is driven by tax incentives and renewable portfolio standards in a number of US states. A growing social awareness of environment-friendly energy has bolstered environmental, social and corporate governance investment, said Ushijima, who pointed out that in Europe, environmental, social and governance (ESG) investment accounts for 60 percent of total energy investment.
Infrastructure issues are resulting from the domestic boom in production, with Cuclis asserting that there is significant pressure on pipeline capacity, which has resulted in a number of new projects due to come on-stream in the next couple of years. New pipelines do face environmental challenges as well as the previously unanticipated problem of the rising cost of steel as a result of new tariffs on imports into the US.
In terms of the downstream US energy sector, Cuclis said he is "relatively bullish" about a second wave of LNG export projects, with four or five projects due for a final investment decision before the end of the year, although Gordenker sounded a note of caution, given that demand is increasing by incremental steps rather than in waves, and suggested that there is a need to "get away from this boom-bust cycle."
Addressing the question of export markets for US LNG, Cuclis identified Mexico, South Korea and China as the largest consumers of US gas, although trade agreements—particularly with China—are under a cloud as a result of the present US administration's trade policies and tariffs. While the US energy industry appears to be a beneficiary of President Donald Trump's policies, including the rollback of some environmental regulations and the streamlining of permitting processes, there are a number of downsides to the present government, Cuclis said, such as the "more unpredictable nature of policymaking in Washington."
On the other hand, Cuclis added, Europe appears to offer some interesting opportunities, as governments there are interested in hedging against their present reliance on Russian energy supplies.
Gordenker agreed that the unpredictability of the US government on a number of issues has led to polarization between the federal government and the states, on coal-fired power plants, for example, which has exacerbated uncertainty among investors and the industry.
Asked to summarize the state of the industry, Cuclis said the US energy industry is enjoying "a very dynamic time" and that few would have envisaged the US becoming an exporter of LNG a decade ago. There are many opportunities in the industry and entry points for investors—but predicting where the sector will be in another ten years' time is close to impossible, Cuclis added.
Speakers proposed emerging solutions that would be relatively straightforward to implement and would be quick to make a positive impact, such as economies shifting to renewables, infrastructure enhancements and the rise of LNG.
At the same time, panelists expressed concern over the volatility of US trade policy, capacity challenges and unstable oil prices. Only time will tell which of the shifting forces will dominate the future of energy.
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