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IHS Report: Energy and the New Global Industrial Landscape: A Tectonic Shift


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The executive summary of a new IHS report on how shale gas and tight oil (i.e., unconventional energy) is changing the U.S. and the world. In 2012 alone, unconventionals created 1.7 million jobs and generated $62 billion in new federal and state revenue. The new study was released at the World Economic Forum in Davos, Switzerland in Jan. 2013.

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IHS Report: Energy and the New Global Industrial Landscape: A Tectonic Shift

  1. 1. IHS GlobalView Insights Davos 2013 Energy and the New Global Industrial Landscape: A Tectonic Shift?Energy and the EconomyOil and EnergyChemicalsAutomotive
  2. 2. Nariman Behravesh ENERGY AND THE ECONOMY Chief Economist, IHSIn a matter of a few years, the unconventional Improved competitiveness and more capital inflows.oil and gas revolution has dramatically changed The boom in nonconventional gas and the resulting big drop in prices have lowered feedstock costs for the petro-the global energy landscape, and in its wake is chemicals and other industries, as well as electricity costsaltering the competitive global manufacturing for industries such as steel, aluminium, and glass. Thisand industrial landscape. Initially, this has “competitive stimulus” has already attracted European,been—and will continue to be—a big boost Latin American, and Asian energy-intensive investment and encouraged US producers to “onshore.” For thefor North America. However, other regions first time in many decades, a number of large globaland countries with large shale gas and tight oil chemicals companies have announced plans to build ordeposits can, with time, also participate in this expand facilities in North America for exports—capitalenergy revolution and industrial “renaissance.” expenditures totaling around $95 billion in the nextIn the meantime, it is becoming increasingly decade, focused primarily on ethylene production.apparent that this development is improving Reduced global imbalances.the manufacturing competitiveness of the As nonconventional oil and gas production rampsUnited States. up in the United States, oil imports are declining (US net oil imports are down from 60% in 2005Why North America? to 42% today). We expect the United States and CanadaThanks to a combination of forces, the large-scale to become exporters of liquefied natural gas (thoughextraction of gas from shale deposits and oil from not without considerable political debate in the Unitedshale and other dense rocks has occurred first in North States). Exports of petroleum products, petrochemicals,America. These forces include: a well-developed energy coal, and fertilizers will continue to increase. These trendsinfrastructure, private-sector ownership of mineral rights, will dramatically reduce the US trade and current-a competitive industry with lots of independent drillers, account deficits (already down from a few years ago).access to risk capital, flexible and adaptive supply chains,and supportive state regulations and fiscal regimes. This is Positive and negative environmental impacts.primarily a story of market forces and entrepreneurship, The biggest positive environmental impact of the surgenot government incentives or intervention. in gas production is the 9% drop US carbon emissions just since 2007. The US is back to its 1995 level—evenLarge and positive economic impacts. as emissions have continued to rise in Europe and China.According to a new study by IHS, in the United States This is mostly thanks to the switch by US electricalone, the direct, indirect and induced effects of the surge utilities from coal-fired to gas-fired power nonconventional oil and gas extraction have already Environmental concerns about nonconventional fuelsadded 1.7 million jobs (with 3 million expected by 2020) relate to the potential hazards from the hydraulicand $62 billion to federal and state government coffers fracturing process used to release oil and gas fromin 2012 (with $111 expected by 2020).1 The big winners shale and other dense rocks. These are manageableare US consumers, domestic energy intensive industries, risks that technology, sensible regulations, and industryenergy producer, and electric utilities. “best practices” can mitigate. Rapid Jobs Growth Projected in the Unconventional Policy challenges. Oil & Gas Sector in the United States North American policymakers are faced with the task (Millions of workers) Source: IHS of nurturing the energy boom, while protecting the4 environment. Job-short Europe, Asia and other parts of3 the world, face the risk of migration of manufacturing to North America and the loss of competitiveness. For2 countries such as Japan and Germany, the challenge is compounded by policies aimed at abating or eliminating1 nuclear power from their energy mix, and the consequent need to close the power-generation gap with more expen-0 sive sources of energy. Governments worldwide in regions 2012 2020 2035 of high resource potential need to consider whether they These projections include direct, indirect and induced impacts want to establish the preconditions that will stimulate1 IHS, America’s New Energy Future: The Unconventional Revolution and the Economy 2
  3. 3. ENERGY AND THE ECONOMYthe development of unconventional natural gas and oil trade flows for manufacturing. Cost competitivenessresources, and the direct and indirect economic benefits of North American energy-intensive industries willthat will flow from such development. put downward pressure on pricing and costs in other regions of the world. Moreover, lower price gas willIndustry ramifications. challenge the economics of new nuclear and renewables.Other ramifications of the new global energy and All of this will require companies in the most affectedindustrial landscape that will emerge over the next sectors to rethink their medium- and long-term strategiesfew years. For example, the pattern of global trade vis-à-vis sourcing, production, and natural gas will likely change substantially, as will Daniel Yergin James Burkhard OIL AND ENERGY Vice Chairman, IHS Managing Director, IHS CERAOil Market Outlook: Non-OPEC’s Big ChanceThe price of Brent crude set a new record international community remain elevated. Sanctionshigh in 2012 at $111.67 per barrel—and is are keeping about half of Iran’s normal levels of exports out of the market. Iran has shown no signs of haltingat a similar level in so far in early 2013. Yet uranium enrichment, and some believe that this is thethe oil market remains well supplied and signs year when the “red line” of enrichment will either leadsuggest fundamentals may be loosening. to some diplomatic resolution or to some kind of conflictThis is primarily due to increased Saudi output that could shake the oil market. Yet, at the same time,and to the growth in non-OPEC supply and, high levels of supply from Saudi Arabia and growth from the United States and Canada have helped the marketin particular, the unconventional oil and gas adjust to the losses from Iran, as well as those from Syria,revolution in the United States, which has Yemen, and South Sudan.pushed up US oil output by 25% since 2008 The global downturn and “post-peak demand’and turned North Dakota into the second- in the OECD.largest oil-producing state in the United States. The impact of the global recession continues to be feltIt is here where we see the first effects of on the global market. World oil demand growth in 2012the unconventional revolution on world was 750,000 b/d—an increase of 0.8% from 2011. That is well below the trailing 10-year average increase ofenergy markets. 1.4% annual growth. Demand growth is expected to beIndeed, it looks as though 2013 may see a rare occurrence somewhat stronger in 2013, at around 1 million b/d.for the world oil market: supply growth from non-OPEC Asian demand—led by China—is the key source ofmay exceed the growth in world oil demand. This has growth while demand in the OECD is generally flat.happened only four times since 1986 and two of thoseyears were during the Great Recession of 2008–09, when Indeed, even without the current downturn in Europe,oil demand fell. Meanwhile, Iraq could see production we believe that the OECD demand picture reflects arise by around 400,000 barrels per day (b/d) to an structural change. The OECD is at “post-peak demand.”average of 3.4 million (b/d)—making it the second OECD oil demand peaked in 2005 at a high point oflargest producer within OPEC for the year. 50.5 million b/d. We do not expect it to exceed that level again—owing to demographics and government-mandat-Why have oil prices been trading in a high, narrow range ed policies. As it is, OECD demand in 2012 stood at 46if the market is well-supplied? Supply outages—actual million b/d.and feared—in the Middle East and also elsewherecontinue to keep prices high. Syria’s civil war is raging But can non-OPEC actually deliver on the potential foron, with President Bashar al-Assad’s regime increasingly a major production increase? Oil supply growth outsideon the defensive. Tensions between Iran and much of the of OPEC—led by tight oil development in the United 3
  4. 4. OIL AND ENERGYStates—could meet or even exceed the total gain in world The new year offers the prospect of a break from trend inoil demand growth. IHS CERA projects that non-OPEC the form of strong non-OPEC growth—and this couldsupply will expand by about 1.1 million b/d in 2013 be a moderating influence on the oil price. But somecompared with a year earlier—slightly higher than the seemingly intractable geopolitical worries—such as Iran’sexpected increase in world oil demand. nuclear activities—could put further upward pressure on oil prices. The relative strength of these counteractingThe impact on price. forces—along with the health of the global economy—If strong non-OPEC growth materializes, what would will determine the direction of the oil price in mean for the oil price? Assuming demand shocks areavoided, two potential outcomes loom. Going global. Increasingly, both companies and governments areThe first is non-OPEC growth is matched with cutbacks asking the same question: will the unconventional oil andfrom key OPEC producers. This would diminish the gas revolution go global? The answer will have a majorlikelihood of a big increase in oil inventories that would impact on global energy markets and the global industrialweigh on prices. It would also increase the amount of landscape. The geological conditions likely exist. Therespare production capacity, which should be a downward is no reason that North America would be unique.force on prices. How? By reducing the geopolitical “fear Moreover, technology migrates very rapidly in the world’spremium” from what it would otherwise be. The fear oil and gas industry.premium in the price of oil is pronounced when thereis a relatively small cushion of spare capacity that can be At this point, the expectation is that these kind ofcalled on to offset supply disruptions. In this case, there resources will be developed in other parts of the world…is a moderation in oil prices, but no severe and sustained but with a lag. As noted earlier, the circumstances thatdecline. Spare production capacity would increase from promoted this development in the United States differ inaround 2.8 million b/d in 2012 to about 4 million b/d important aspects from other parts of the world: a largein 2013. number of independents, private ownership of mineral rights, infrastructure, and service ecosystems. Moreover,Actually, something along these lines is already the development of these resources requires experience,happening, with Saudi Arabia cutting back its production the build-up of knowledge, and trial and error. It alsoin the past two months. Saudi oil output has dropped involves different kind of work practices and 200,000 b/d in November 2012 and by another Governments also have to create fiscal and regulatory400,000 b/d in December to bring the average output regimes that permit work to go ahead and avoid beingin the latest month to 9.1 million b/d. At its peak during overly prescriptive with evolving technologies.the spring of 2012, the kingdom was producing ataverage monthly rates of 9.9 million b/d. With that said, major opportunities have been identified around the world—ranging from Mexico and ArgentinaA second potential outcome is a significant increase in to Western and Eastern Europe, West Siberia, Algeria,world oil inventories. This would occur if the supply and parts of Saudi Arabia—to name just some. Our owngains from non-OPEC (and Iraq), are not accommodated research indicates that the resource base in China maywith cutbacks from OPEC members. Large inventory be larger than that in the United States. However, it isbuilds would be a bearish signpost for the oil price and in very early days, and we believe that it will take severalcould potentially shift market psychology from concern years before significant amounts of unconventional oilabout supply adequacy to worries about too much oil in and gas begin to appear in other regions.the market.The critical assumption in either of these outcomes is,of course, strong non-OPEC oil production growth. Thenon-OPEC supply story is based on real potential—no-tably further large gains from the ongoing revival ofNorth American oil production. However, non-OPECsupply projections have a history of disappointment dueto technical and weather-related difficulties and securitychallenges. A strong year of non-OPEC gains would buckthe past decade’s trend of underperformance—but suchgrowth is far from assured. 4
  5. 5. Oil Gas Sector in the United States (Millions of workers) Source: IHS 4 3 Gary Adams CHEMICALS Chief Advisor, IHS Chemical 2Chemical Industry Impacts 1 0 2012 These projections include nonconventional 2035 and 2020The North American direct, indirect and induced impacts oil materials represent as much as 75 percent of the totalgas revolution is having profound impacts on petrochemical production cost, therefore playing a key role in capital investment decisions. Productionthe global chemical industry. Consider the expansion from 2000 to 2012 has occurred mostly in thefollowing historical trends and future prospects: Middle East and China, driven by competitive feedstockA North American Chemical Industry Renaissance incentives (in the Middle East) and a desire by China toIs Underway: maintain a higher level of self-sufficiency in chemicals manufacturing (relative to the amounts of required North America Basic Chemicals Plastics imports to meet growing domestic demand). Cumulative Production Trends (MM metric tons) Significant differences in prices for natural gas and crude70 oil have developed due to extremely diverse market60 dynamics associated with a steep increase in North American supply of natural gas. Consequently, the50 significant difference between North American natural40 gas based raw materials and those related to crude oil has transformed North America into a low cost region30 for chemicals production. This advantage is attracting20 significant capital investment as producers across the region link up new sources of low cost raw materials with10 retrofitted or new facilities capable of leveraging this low 0 costs into a global supply position. For the first time in 90 95 00 05 10 15 20 more than a decade, a number of global chemicals companies have announced plans to build or expand facilities in North America. As much as 10 million metric tons of new ethylene capacity (a basic building block forExpansion and growth in the 1990’s turned to the chemical industry) is forecast to be built in Northclosures and stagnation in the 2000’s due to energy America in the near term. Producers of other chemicalmarket dynamics: products linked to natural gas economics (methanol forThe North America market for basic chemicals and example) are also advancing new capacity plans.plastics enjoyed a period of strong growth during the1990s, adding almost 50 million metric tons of new Finished goods production continues to migratebasic chemicals and plastics production. Annual growth to low-labor-cost countries, adding opportunityaveraged an impressive 5.0 percent during this period for cost-advantaged producers of commodityof strong manufacturing of durable and non-durable chemicals and plastics to expand exports:finished goods. The economic slowdown of 2000-2001 Expansions in new chemicals capacity will require acombined with a steep rise in raw material prices abruptly major commitment to the export market, as growth ineliminated further chemicals production growth. A North America domestic consumption is expected tosteep decline in competitive position forced closures of remain moderate. Fueled by exports, basic chemicalschemical plants and off-shoring of significant finished and plastics production from 2013 to 2020 is forecastgoods manufacturing while at the same time attracting to increase at an average rate of about 5 percent per year.finished goods imports. North American closures became Longer term (2020 – 2030), given expectations thata stark reality despite markets such as China continuing North America will remain a low-cost energy and feed-to require increased levels of basic chemicals and plastics stock source for the chemical industry, the region couldimports to meet growing demands. return to more downstream manufacturing of durable and non-durable goods based on these low-cost chemicalsPetrochemical investment in North America is and plastics. The result will be a stronger growth rate forbeing reignited by hydrocarbons from unconventional domestic consumption of basic chemicals and plasticssources, reshaping the global capacity profile and relating to “on-shoring” of certain products such as thosetrade patterns: consuming polyethylene (film).Chemicals production costs are highly related to thevalue of the hydrocarbon inputs as energy-derived raw 5
  6. 6. Philip G. Gott AUTOMOTIVE Senior Director, IHS AutomotiveA New Automotive Landscape: No Shortage of Big ChallengesDespite some short term good news, the New powertrain and vehicle technologies require massive investments at a time when the market forautomotive industry is facing unprecedented these technologies is uncertain at best.long term challenges. Near term, the impact of Mature market participants are investing heavily in RDgovernment policies and incipient recovery in for advancing technologies to meet the world’s toughestNorth America will be apparent in 2013 when performance standards for safety, air quality and energyit is expected that 15.1 million light vehicles will efficiency. Regulators in these markets are promoting a variety of solutions ranging from electric vehicles andbe sold in the United States, compared to natural gas, on the one hand, to severe restrictions on the11.6 million in 2010. China is also expected use of selected vehicles in problematic areas on the do well, with sales of 20.5 million this year, The industry needs greater clarity and long-term visibilitycompared to 17.0 million in 2010. In other major in regulatory policy to make more effective the investments needed in the story will be less upbeat. Consider18.1 million sales in Europe for 2013, compared The advantage goes to new entrants who canto 18.4 million in 2010, and 4.68 million in embrace new markets and technologies with no “legacy” costs.Japan, compared to 4.87 million in 2010. New entrants in growth markets in the emerging worldEven in the US, however, 2013 sales are can invest in production of required new technologieswell below the peak of just under 17 million with advanced manufacturing techniques without theachieved in 2005. burden associated with the obsolescence of older technologies and factories and of legacy labor andOverall, growth expectations for emerging markets will pension costs. The rapid expansion of their homepropel the number of worldwide cars and trucks from “growth” markets often affords them the opportunity900 million today to between 2 and 3 billion by 2030 for better capacity utilization than their mature(there are many diverging views on just how many cars market counterparts.there will be and how much they will be driven). Withmost of the world’s population living in urban areas by At the same time, regulatory requirements in emergingthen, the prospects for congestion are daunting, not markets are lagging those of mature markets. Newto mention the demand for energy and the challenge entrants based in the new growth markets can adoptof dealing with the waste products. To address these technologies developed at the expense of their matureissues, there are so many possible alternative scenarios market counterparts. In some cases this is a boon tothat making the affordable investments necessary to global suppliers, but puts mature market vehicle makersprepare products and business models for any likely at a relative disadvantage as they bear the brunt ofcombination of plausible energy and policy outcomes development and integration a huge challenge. We have entered a new age inwhich collaboration and cooperation amongst all the The different bases of competition in each market, canstakeholders is the best—if not the only—course to also favor the new entrants. The organic growth of newensure the long term survival of the players as the markets is fueling public and private investment inautomotive and energy industries evolve. new automakers and their suppliers who are anxious to compete in all the world’s markets. Manufacturers basedThe global recession has coincided with a global in the mature markets are competing for share withshift towards emerging markets. increasing numbers of competitors. This means that largeOver the next decade, compound annual growth rates investments in differentiated products are needed just to(CAGR) for the mature markets of Europe and NAFTA hold market position. Automakers based in expandingare forecast to be 2.2 and 1.4% respectively. But this markets are enjoying organic growth while required togrowth is exaggerated from trend due to the recent deep meet less stringent standards for emissions and safety inrecession. From 2000 to 2024, CAGR is expected to their home markets. Margins in the mature markets arebe just 0.77% in Europe and 0.12% in NAFTA versus thin while the potential for profits in the growth markets12% in Greater China, 7.7% in S. Asia, 6.4% for Latin is much greater.America and 4.6% for the Middle East and Africa. ForJapan and Korea, the combined CAGR for this sameperiod will be negative. 6
  7. 7. AUTOMOTIVEEncouraged by concerns over congestion, social Optimizing the benefits to society and the transportpressure and regulatory mandates, the consumer’s sector will require a coordinated approach by“love affair” with the car may be turning into a star- regulators, energy (including electric power)crossed relationship. companies, the auto industry and fleet operators.For most of the history of the automotive industry, Energy, transportation, clean air and climate changeconsumer demand has been taken as a “given.” This is policies need to be aligned so that limited vehicle andno longer the case. In some countries, the percentage engine development resources can be focused on a costof under-40 age cohorts holding driver’s licenses is effective path to maximize the long term returns withoutdeclining. With over 50% of the global population living compromising achievement of other societal objectivesin urban areas, the congestion and other inefficiencies or the competitive position of the industry participants.of owning a car are giving rise to new forms of mobility Those countries who take a coordinated approach tofrom virtual travel on the internet to new business meeting transport energy demands will minimize themodels of public and private car ownership, all with the financial challenge to their domestic energy andencouragement of local politicians and regulators anxious automotive industries, ensuring their long termto reduce noise, pollution and the inefficiencies of competitiveness.intra-city travel. It is unclear how much longer the loveaffair will survive even in today’s high-growth markets.Some of the most aggressive access restrictions andburdensome licensing requirements are appearing inthe cities of China and India, while innovative newcar-ownership models are appearing in Latin Americaas well as the US and Europe. With future motorizationrates in some cities at less than half that of their countryaverages, the magnitude of future market growth is farfrom certain.Unconventional energy sources are a major causeof uncertainty and raise questions about the needfor greater collaboration and coordination betweenautomotive and energy industries as well as policymakers.What powertrain and vehicle technologies and associatedmanufacturing and post-sale customer service capabilitiesare needed in the future? In Europe, the United States,Japan and China, the industry has invested heavily inelectric vehicles. Some European countries and provincesin China provide incentives for natural gas vehicles,while in the US the future of this fuel for light vehicles isunclear. How much emphasis should be put on aggressivepursuit of any one of these technologies, and for whichmarkets? Or should investment continue to focus onadvanced gasoline- and diesel-fueled vehicles? 7
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