Energy markets prove buoyant

For an industry tossed about by unprecedented oil price volatility, changing energy consumption patterns and a worldwide drop in fuel demand, the once unassailable energy sector demonstrated remarkable resilience this past year.

At the start of the year, oil and gas producers were grappling with the most difficult conditions their industry had faced in at least a decade. The price of crude had tumbled more than 70 per cent from its record of more than US$147 per barrel in July last year, constricting cash flow and erasing profits from high-cost oil extraction ventures such as oil sands. Global oil demand had been falling for nearly a year as the world economy slid into a deep recession. US natural gas prices followed a similar path as a surge of new production preceded a sharp contraction in industrial demand. Many banks stopped lending, making project financing a nightmare for energy developers. Worldwide gluts of oil refining, petrochemicals and gas liquefaction capacity replaced former supply bottlenecks.

Finding their export revenues shrinking, the governments of oil producers had less to spend on social and economic diversification programmes. Several tried to extract more rent from foreign oil firms operating on their soil. Others, following populist agendas, threatened to nationalise their energy sectors. Climate change clawed its way up the international agenda and seemed to hold bright prospects for renewable energy development. Yet existing manufacturers of solar panels and wind turbines found their customers reluctant to spend, sending prices for the hardware plunging in oversupplied markets.

Trust politicians, however, to create an artificial energy shortage amid ample supplies. In January, a recurring contractual dispute flared up between the major gas supplier Russia and the gas transit state Ukraine, which escalated into a crisis when 20 per cent of Europe's gas supply was cut off during a cold snap. EU states moved quickly to invest in gas storage, pipelines and receiving terminals for liquefied natural gas (LNG) while encouraging renewable energy development. The proposed Nabucco pipeline to move Central Asian and Middle Eastern gas to Europe, bypassing Russia, and the Desertec project to supply Europe with electricity from North African solar arrays and wind farms were among the major projects gaining political traction.

Energy-sector construction costs started falling in late January, opening up investment opportunities for a few well-capitalised international energy companies and rather more state-owned enterprises. Abu Dhabi National Oil Company (ADNOC) was among the early investors, awarding US$3.5 billion (Dh12.85bn) of contracts related to oil projects that month. It followed up with gas development contracts and in July launched a $10bn joint venture with ConocoPhillips to develop Abu Dhabi's Shah field.

The Abu Dhabi Government-owned International Petroleum Investment Company (IPIC) then went shopping in February, snapping up the North American chemicals producer Nova. The government-controlled entities Mubadala Development and Abu Dhabi National Energy Company, or Taqa, also made overseas energy investments. Mubadala won a joint venture contract to boost oil production in Bahrain and with European partners awarded ?1bn (Dh5.28bn) of contracts to build a UK offshore wind farm. Taqa bought gas assets in the Netherlands and Canada, as well as the North Sea delivery system for the European benchmark Brent crude oil. Taqa's buying spree came to an end in August, however, when the company's chief executive was replaced.

Qatar also invested heavily in energy this year, building the world's biggest and most efficient LNG production facilities, the first of which was inaugurated in April. Through the series of new projects brought on stream throughout the year, the Gulf state consolidated its position as the leading global LNG exporter. Despite the glutted international gas market, analysts forecast rich long-term rewards.

Not every Gulf energy exporter jumped into countercyclical investment. Though crude prices were rebounding by March as China built up strategic stockpiles, Saudi Aramco cut drilling by 20 per cent. The kingdom was in the final stages of the biggest oil capacity expansion in its history just as it was being asked to cut oil output substantially in its role as the OPEC swing producer. Kuwait scrapped a $15bn oil refinery project in the same month as political tensions flared between the emirate's government and parliament. The political impasse also derailed ambitious Kuwaiti plans for oil and gas production projects.

Inadequate local gas supplies continued to beset most GCC countries last year, as demonstrated by summer power cuts in Saudi Arabia and in Sharjah. In response, Kuwait built an LNG receiving terminal and in August imported its first cargo from eastern Siberia. Dubai advanced plans to start LNG imports next summer, while Abu Dhabi's IPIC made an indirect investment in a big LNG export project in Papua New Guinea. Saudi Arabia, meanwhile, burnt more crude for power generation.

In its quest to develop long-term solutions to regional power and water shortages, the UAE launched a civilian nuclear power programme with support from the US and international nuclear powers, becoming the first Arab state to take that step. Another major energy development was Iraq's decision to invite foreign companies back to its oil sector for the first time in 40 years. Despite strong domestic political opposition, the oil ministry held two auctions for oil and gas licences, offering access to about 80 billion barrels of reserves. However, Baghdad's terms were so tough that only one contract was awarded in the first round.

Following a more successful second bidding round this month, the ministry announced plans to quintuple Iraq's production capacity to as much as 12 million barrels per day by 2015, a figure which would rival that of Saudi Arabia. The country must still overcome formidable logistic and political hurdles to realise its ambitious goal. Global oil stockpiles are still well above average as the end of the year approaches amid considerable uncertainty about the rate of economic recovery. Crude has recovered from below $35 per barrel to about $75, a price the Saudi oil minister has called "perfect". Credit markets are loosening and China, with its vast and expanding appetite for oil and gas, has emerged as the world's energy banker.

All that bodes well for global oil development next year and there were plenty of major oil discoveries in the past 12 months. Yet it is gas that seems poised for an investment boom. ExxonMobil, the largest international oil company, made a major investment this month in US gas shale, one of the most promising unconventional gas resources. International consortia have signed a series of huge trade deals in the past few months to export LNG to Asia from new projects in Australasia.

The outlook for gas has, if anything, received a boost from the international community's failure to reach a binding agreement on carbon emissions at the Copenhagen climate change summit this month. While that development may have dashed hopes for an early, large-scale roll-out of renewable energy, it has also made the case for rapid switching from coal and oil to lower-carbon gas even more compelling.

Gas needs infrastructure, however, including major pipelines crossing international borders. Look for lots of investment and diplomatic efforts on that front in the coming year. @Email:tcarlisle@thenational.ae