Opening the meeting was Thomas Decker, VP and Atlantic Coast Area leader of Brown and Caldwell, who asked attendees if they thought the water and wastewater market was represented by the title of the classic novel, “Watership Down.” His response: It’s not quite that bad.
“Though 2013 was a flat market in which some players in this sector did well, others struggled to survive,” he said. In the first quarter of 2014, the rough winter was a factor, but the month of May—the last month for which figures are available—is up 13% from 2013. The second quarter of 2014 is trending up and signs are positive the market will pick up in the second half of 2014. He also expects that 2015 will likely reflect modest growth for the first time in four years.
Emerging Fundamentals in Global Natural Gas Markets
While there is much talk about green renewables, Kenneth Medlock of Rice University’s Center for Energy Studies pointed out that most of the work in that sector is being done in highly developed countries, mostly because they are the most expensive source of power. "The world going out to 2040 is still very much hydrocarbon dependent, and that is not going to change quickly," said Medlock. "There is just too much capital on the ground."
Referring to coal plants, Medlock said that while many of those in the U.S. were developed in the 1970s, in China, huge numbers of coal plants have been built in the last decade. Since the lifespan of those plants ranges from 30 to 50 years, they will stay in place. "For other fuels to inhabit that space, they will only capture margin," said Medlock. "They can't penetrate what already exists. Going forward, however, China will be the driver for LNG demand, but it will be by degrees."
Medlock shared several interesting photos of earth at night. "These show you exactly where energy is being consumed—but where it is primarily used is not necessarily where it is available,” he said. “Tapping into the shale resources has changed this to a great degree in North America, as available resources are closer to markets. But it’s much more than just the geology that has made the U.S. able to capitalize on the shale resources.”
According to Medlock, sufficiency requires a host of other things, and many of those are unique in the U.S. “Nowhere else in the world will you see the pace of development as in the U.S.,” he noted, “because nowhere else in the world can a developer negotiate with a landowner for mineral rights. You also need a well-developed pipeline network that can accommodate new production volumes, and you must have a market where a well-developed service sector exists that can facilitate fast-paced drilling activity and provide rapid response to demands in the field.”
Upstream Outlook for Oil and Gas Industry
John Spears, president of Spears & Associates, gave his annual update on the oil and gas market. He reported that the U.S. accounts for approximately 45% of the global market, which will come close to $425 billion in 2014.
“The struggle,” he said, “is how to measure activity in the sector. It used to be that we would go by the rig count, but in the last couple of years, the productivity of rigs has changed. The industry now has multiple ways of trying to assess how productive they are. And, the relative number of wells being drilled has not changed, but the spending on those wells has increased because there is more intense use of services at each well due to the tight gas and oil that is being recovered.”
Spears calls the market calm and orderly, but cuts it into two segments: U.S. vs. Non-U.S. As has been the case for the past decade, all the incremental growth in global oil demand is coming from emerging economies, which now account for 50% of total demand. Oil use in developed economies continues to trend flat-to-down due to energy efficiency improvements and sluggish economic growth.
“In the U.S., consumption has stayed flat because of increased engine efficiency and a drop in miles driven while demand for oil in fuel, heat and feedstock applications in the industrial sector is rising with economic activity. However, U.S. oil production averaged 12.3 million barrels per day (bpd) in 2013, up 11% for the year. It is projected to grow 11% in 2014 and 7% in 2015, to an average of 14.6 million bpd. This could be a problem,” he said. “If you have less demand and more production—and we can't export—that means more oil than demand.”
U.S. crude oil exports are restricted by law, and he does not expect restrictions to be substantially lifted until after 2016. Spears said that if a combination of increased crude oil exports and refinery expansions does not absorb most of the expected growth in U.S. oil production, then U.S. crude prices are likely to fall to the point (below $80/bbl) that operators cut back drilling activity in order to reduce the growth in production.
Hydrocarbon Processing in a Changed Global Environment
Mark Peters, publisher of the Oil and Gas Financial Journal, enumerated the factors shaping energy expansion for the next decade. "You can't discuss anything in this industry without talking about tight oil and gas," he said. Policies aimed toward mitigating climate change are having an effect on the industry. However, he said, “Australia recently began repealing their strong climate change taxes and rules due to damage to their economy. This will have an impact on other developed countries as they look at their climate change programs fact."
Despite the fact that the U.S. is reversing 40 years of declining oil production, he said, "Oil prices are high. There is a ‘war premium’ because of ongoing strife. The U.S. has already surpassed Russia as the largest gas producer and Saudi Arabia as the largest oil producer. This will have an impact on global refining, LNG, pipeline capacity and petrochemical activity."
Peters suggested that lower prices of natural gas and long-term supply should drive industrial regeneration in the U.S. and aadditional gas exports will drive global prices down. Oil & Gas Journal forecasts U.S. capital spending for pipelines in 2014 to be $15.6 billion, refining to equal $12.9 billion in 2014 and petrochemical capital spending to total $5.6 billion in 2014. "Gas intensive petrochemicals will see the strongest growth," said Peters.
Petrochemical on the Rebound in North America
Peters' position was echoed by Mark Eramo, VP of chemical market insights for IHS Chemicals, who was also very positive about the opportunities for growth in this sector over the next decade.
According to Eramo, consumers are the drivers of chemical demand, while energy drives manufacturing costs. The shale gale has provided an abundance of raw materials in the form of tight oil and gas, the price has gone down, and the upturn in GDP across the globe has increased markets.
Eramo expects global capacity of basic chemicals to rise from 290 million metric tons (mmt) in 2000 to 640 mmt in 2020. Where the facilities to create these chemicals are built is very important, he said. They should be close to good source of energy and feedstock, which together comprise 60 to 70% of the costs of chemical production. Investors seek a competitive advantage in energy and feedstock costs; in the U.S. there currently is a $1,000 per ton advantage.
“The next factor is if the asset can be built right where the demand is happening,” he said. “That is a bit of an issue for North America as manufacturing has been moving off the continent for some decades. However, that is changing somewhat, particularly for high supply chain intensity products like those for the aerospace industry, autos and assemblies.”
The World Economy
During her presentation on the world economic situation, Simona Mokuta, director of Asia-Pacific Economies for IHS Economics, pointed out the countries that are making a good recovery from the 2008 recession. Australia is now at nearly 120% of pre-2008 levels while Canada is at 110% and the U.S. is at about 108%. "Real GDP growth will strengthen," said Mokuta, "but the emerging market growth premium has permanently narrowed. And the pace of globalization has slowed."
Since the end of the recession, corporate profits have grown much faster than investment. "This is a problem," she noted. "Real GDP has long surpassed the level prior to the recession, but employment has languished and corporate profits are crazy." According to Mocuta, in Europe, there is a greater emphasis on growth versus austerity, but the structural rigidities within the Eurozone are still a big challenge. She does, however, expect the Eurozone economy to slowly recover.
Mocuta asserted that, while China has experienced a meaningful slowdown, she sees no hard landing. “The current slowdown in China is milder, but will be much more protracted than the great recession,” she said. “The rebound will be much weaker. What happens there will change everything in the world. We must watch that economy carefully."
Mining for Profits
Glenn Ives, chair of Deloitte Canada, observed that technical innovations could do much to improve the financial outlook for mining, but one of the problems is that miners are really conservative people. "While we have to be really efficient movers of dirt and crushers of rock, we need to look at mining as an integrated system," he said. "We do things the same as we did them in 1900."
Among the challenges for mining is resource nationalism and the talent gap, but Ives sees information, mining and energy technologies helping to make the sector healthier in the long term. Ives suggested that efficiencies and advantages being developed by valve, actuator and control companies could help the mining industry achieve energy savings, which would not only reduce costs but also make the sector more attractive to investors. "If the mines were electrified using only natural gas and renewables, emissions would go down by 98%,” he said.
There were many more presentations, including an in-depth look at the situation with the oil and natural gas and stock markets, so check back for additional Web features here at VALVEMagazine.com and don’t mess the feature article in the fall issue of VALVE Magazine to learn more from this informative annual event.