U.S. energy surge is a game changer
The continuing surge in U.S. oil and natural gas production – primarily from unconventional resources, such as shale gas and light, tight oil, made the U.S. the oil and gas industry's largest source of growth. The U.S. looks to be a net exporter of gas within the next 2-3 years, while net oil import dependency has been sharply reduced.
The potential opening of Mexico's energy sector will present the U.S. with some investment competition and may move capital away from U.S. unconventional plays. At the same time, global gas and LNG (U.S. LNG export approvals, East African LNG development and the end of the Gazprom monopoly for Russian gas exports) also play a significant role in impacting the unconventional landscape.
“The surge of the U.S. energy market really was a game changer in a relatively short time," says Deborah Byers, the Oil & Gas Leader for Ernst & Young LLP in the U.S. "And we think those changes will continue to play out in 2014. On the oil side, given the expected capacity growth in OPEC and the continuing growth of non-OPEC output, we're probably looking at some downward pressures on oil prices. But on the gas side, we see the market coming into more balance, offering prospects for some upward pressure on gas prices."
Global oil prices drifted down over the last quarter of 2013, as the global supply/demand balance loosened, largely due to continuing strong increases in non-OPEC oil production. However, recurring security problems in Libya and Iraq limited some supplies, easing some of the pressures on OPEC, given the still relatively weak oil demand environment.
The possibility of a return on some Iranian exports as a result of the compromise late in the year, in conjunction with expected additional non-OPEC supply increases, does put some additional pressure on OPEC to maintain production discipline and possibly cut back production in 2014.
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In the U.S., the massive infrastructure build-out had removed much of the price distortions that had been dominant over the last few years, but as U.S. production continued to surge, the "surplus" was simply shifted south from the Midcontinent to the Gulf Coast, aggravated by the effective ban on crude exports (minimal crude exports are allowed to Canada). As a result, some of the price distortions have returned.
“We can expect to see the distortions continue in the short-term, but we also believe that policy-makers will address the export ban in the near future,” said Marcela Donadio, the EY Americas Oil & Gas Leader.
U.S. gas producers celebrated the arrival of an early cold winter, which took gas storage levels below normal for the first time in years, and brought prices up close to $4.50 per million BTUs. U.S. gas production remains relatively high and the higher prices will incentivize further production, while at the same time, the higher gas prices have slowed the switch from coal to gas in the power sector.
With product prices easing along with crude prices, refiner margins decreased slightly in the fourth quarter. Notional cracking margins on a NYMEX 3-2-1 basis averaged about $15 per barrel in the fourth quarter and about $23 per barrel for the year, down from an average of about $30 per barrel in 2012. While average margins were down slightly for the year across all of the refining regions, they remained very high on a historical basis and refiners took some cheer in the fact that the slump in U.S. oil demand appears to have ended.
Total global rig counts remain relatively flat and generally below year-earlier levels. As they had throughout 2013, rig counts in the U.S. continue to disappoint. In contrast, international rig counts have continued to increase fairly steadily. Upstream operators are seen to becoming more cautious in their spending plans, and while spending is expected to continue to increase in 2014, the increases (5-7 percent) are expected to be less than those estimated for 2013 (8-10 percent).
Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.