Fossil Fuels in Favor as Investors Seek Returns in a Turbulent World
By Amy McLellan
From Issue 4, 2024 of Breakbulk Magazine
(4-minute read)
Jittery is perhaps the best word to describe energy markets right now. At the mid-year point, the hopes of a return to more normal times are being tested by a world that remains in flux. Extreme weather events, political turmoil, economic sanctions and escalating conflict zones continue to cast shadows over global trade and add to inflationary pressures.
Interest rates in key economies remain high – in June, the Bank of England held interest rates at a 16-yearhigh of 5.25% for the seventh time in a row while, across the Atlantic, the Federal Reserve likewise voted to hold interest rates at their current 23-year high even as inflation ticked lower. As a result, leading analysts are warning that energy developers can expect financing and development costs to remain challenging.
“Some of the optimism many held of a better 2024 compared to 2023 is fading,” noted Audun Martinsen, head of supply chain research at Rystad Energy in June. “Procurement arms should increase their budget escalation factors, while suppliers should worry about their sub-suppliers and freight.”
This was the backdrop to Breakbulk Europe 2024, where Dr. Pablo Rodas-Martini, vice president and director of market intelligence at Emerging & Frontier LLC, took a deep dive into economic forecasts for 2024 and 2025, and what current trends mean for breakbulk and project cargo shippers.
His first point was something of a health warning: forecasts are often wrong. He pointed out that in 2022 many analysts, including the World Bank, Deutsche Bank and Nomura, were predicting a global recession that did not come to pass. This is worth remembering when taking into account the GDP growth forecasts for major economies around the world for the coming 12 months.
“Why has the U.S. outperformed Europe? Why did the U.S. grow by 2.5% last year, while Europe barely grew by 0.4%?” asked Rodas-Martini, before finding some answers in globalization (sanctions on Russia have increased exports of U.S. fossil fuels) and more flexible labor markets of North America.
He then turned to China, which has disproved 20 years of “dire predictions” and been “very resilient”’ he said.
Europe, by contrast, has not, with average economic growth of 0.4% – a number dragged down by some under-performing nations. In part this is because the energy crisis, and geopolitical threats, have hit some European nations harder.
Beyond this, there are areas rich with opportunity for the breakbulk and project cargo sectors, mining for the materials to support green energy technology key among them. “I think it has an amazing future,” said Rodas-Martini, highlighting how renewable energies such as solar (copper and silicon) and wind (copper and zinc) will underpin demand for key metals and minerals. And the predicted surge in electric vehicles, from 30 million in 2022 to 240 million by 2050, will require huge amounts of graphite, copper, nickel, cobalt, manganese and lithium.
Rodas-Martini was less enthusiastic about the prospects for mega infrastructure projects, saying he was “very skeptical” about those “supposed to take place in the Middle East.”
Energy Investors: Fossil Fuels Are Back
The energy transition may be driving new opportunities in mining and offshore wind but for many energy investors looking to lock-in returns, it’s back to basics with oil and gas.
As Sharanya Kumaramurthy, market intelligence manager at the Energy Industries Council (EIC), pointed out at Breakbulk Europe in Rotterdam, the first six months of this year have seen a number of major projects announced, and while the bulk are in the renewables and clean energy space, it’s clear the real value lies in old-school fossil fuels.
“Contractors are retrenching into oil and gas due to higher profit margins,” she said, noting that operators continue to re-strategize towards renewables and clean tech, but are now openly supporting spend on their oil and gas assets.
The wider economic outlook continues to weigh on the sector, with delays on some EPC work due to cost increases. Supply chain bottlenecks and disruption are also impacting projects and, as noted above, with interest rates being held at high levels and impacting financing, it remains to be seen what this will mean for project economics and timings going forward.
In the upstream world, there are a number of big offshore projects still awaiting Final Investment Decision (FID), perhaps none being more closely watched right now than Chevron’s 3.5 TCF ultra-deepwater Aphrodite gas field in Block 12 offshore Cyprus. Already much delayed, the project hit the buffers again in May when the Cypriot government rejected Chevron’s revised development plan for the field, which was discovered back in 2011.
The government has called for further improvements and wants the operator to take “specific targeted actions” in the next six months. Indeed, the ministry letter wants the project partners, led by Chevron, which took on the legacy asset when it acquired Noble Energy in 2020, to give “unconditional consent” to start Front End Engineering and Design (FEED) within six months, with a view to first gas by 2027.
Other upstream FIDs anticipated in the next 24 months include OMV’s Berling gas field offshore Norway, ready for start-up in 2028, and Equinor’s Wisting oilfield, with FID due 2026/7 for start-up in 2030.
Another key sector that’s generating opportunities for breakbulk contractors is offshore wind, but, increasingly, this is a market that is distorted by planning and permitting bottlenecks.
“Strong manufacturing capabilities now don’t match the scale of the near future market,” said Kumaramurthy, pointing out that the current permitting process is too slow to match pipeline delivery and renewable power targets. There are more than 468 GW of capacity in the pipeline, of which an astonishing 35% involves largely unproven floating wind, but there remain some serious question marks over the capacity of the grid to integrate this new generation.
This is an industry where it’s important to recognize not just the scale of the market opportunity but also the shifting sands of the regulatory landscape, the economic context and, perhaps most importantly, the quality of the management team behind a project, since that’s the key to securing the investment that will push a project over the finishing line.
Watch our interview with Sharanya Kumaramurthy at Breakbulk Europe:
TOP PHOTO: Jumbo Offshore handles suction piles for an offshore gas field in the Mediterranean. CREDIT: Jumbo Group
