Five trends that will dominate the energy sector this year

Happy New Year and welcome back to Energy Source, your first instalment of 2024, coming to you from New York.

BP and Equinor have scrapped a contract to sell electricity from a massive offshore wind project to New York state in a sign that high costs will continue to dog the sector this year.

But it is not all “doom and gloom”. In his piece on the scuppered contract, Myles writes that US state authorities are showing a willingness to help prevent projects from being abandoned. Deployment of renewables will also continue to break records in 2024, despite headwinds.

Yet the mood in the Middle East, a critical global supplier of oil and gas, remains grim. Twin bomb attacks in Iran yesterday killed nearly 100 people, further escalating tensions in the region and causing oil prices to rise 3 per cent. But the geopolitical turmoil sparked by Hamas’s October 7 attacks on Israel — and the Jewish state’s military response in Gaza — have not yet led to a sustained pick-up in energy prices.

We expand on this below, where we break down five emerging trends for the energy industry in the year ahead.

Thanks for reading. — Jamie

1. Oil prices should be kept in check despite volatility

It has been a bumpy start to the year for oil markets. Brent crude settled at $78.25 a barrel, a jump of more than $2, after yesterday’s bomb blasts in Iran highlighted persistent tensions in the Middle East. 

Ongoing geopolitical uncertainty — notably the potential for escalation of the Israel-Hamas conflict — mean crude price volatility is set to persist, but most analysts reckon bearish fundamentals should keep a lid on prices in 2024. 

Chief among those is uninspiring global economic data. Surprisingly strong US output should also help keep prices in check. Meanwhile, Opec+ infighting — as illustrated by Angola’s exit from the group last month — raises questions about its ability to support prices with enduring supply cuts. 

“The lack of confidence in China’s economy in 2024 remains the market’s biggest concern followed by fear that US production will continue to beat estimates as it did in 2023,” said Rebecca Babin, senior energy trader at CIBC Private Wealth US, which has $100bn in assets under management. 

The US Energy Information Administration estimates average prices of about $83/b for the year. A Reuters poll last week concurred, with analysts estimating prices should stay close to $80/b in 2024, capped by sluggish demand. (Myles McCormick)

2. There is more room for M&A 

A flurry of mega oil and gas deals in quick succession tied off 2023: ExxonMobil-Pioneer Natural Resources at $60bn; Chevron-Hess at $53bn and Occidental-CrownRock at $12bn.

Competition for waning resources — especially in the prolific Permian Basin — means more deals are likely as companies look to lock down drilling inventory. But since many of the big hitters have already played their cards, the scale of transactions this year will probably be smaller. 

Of the big US players, ConocoPhillips has yet to join the party. And chatter continues about the prospect of a seismic Shell-BP tie-up, though as my colleague Tom Wilson has pointed out, Shell’s new boss Wael Sawan has insisted big acquisitions are not a priority between now and 2025.

“The question is: we’ve seen all these big deals, how many more big deals of that size can there be?” asked Eric Otness, head of M&A at Skadden’s Houston office. “We’ve seen all this consolidation on the upstream side. Are we going to see that trickle down or flow through to midstream operators, and service companies?”

(Myles McCormick and Amanda Chu)

3. Renewable buildout to persist despite hurdles

High borrowing costs, elevated prices for raw materials, and permitting challenges will buffet the renewables sector in 2024, but deployment will continue to break records.

The world is expected to install more than 460GW of renewables this year, the highest on record, according to a June forecast from the International Energy Agency. In the US, the Energy Information Administration predicts that electricity from wind and solar will surpass coal-fired generation this year for the first time ever. 

Solar will drive global growth, with installations expected to increase 7 per cent year over year, while onshore and offshore wind additions will dip slightly from 2023. Most of this new renewable energy will be deployed in China, which is expected to account for a staggering 55 per cent of new global renewables capacity this year, according to the IEA. 

This year is also expected to be a “make or break” year for clean hydrogen. At least nine countries have announced subsidies to boost the nascent fuel’s production, according to S&P Global Commodity Insights, but cost increases and weak demand signals have cast uncertainty over the sector. The market needs 10-15 large final investment decisions this year to generate confidence that the fuel is primed for rapid growth, says S&P.

(Amanda Chu)

4. US reshoring will pick up pace

President Joe Biden’s signature Inflation Reduction Act helped spur billions worth of clean tech manufacturing announcements since it was signed into law in 2022. But 2024 is the first year we have clarity on how companies can qualify for the law’s lucrative tax credits and whether these factory announcements will actually lead to new construction.

It’s a tough time to build in the US. The manufacturing boom is colliding with a tight labour market and high material costs, risking factory delays and higher than expected capital expenditures. Whether the US can ramp up factories that churn out clean technologies at competitive costs will be a crucial question as this reshoring initiative plays out. 

Building out a domestic manufacturing base is particularly important for the beleaguered US offshore wind industry given the size of parts needed and the IRA’s tax credits for US-made materials that help offset high upfront costs. Deloitte expects 18 planned wind component manufacturing facilities to begin development this year, with more collaboration between East Coast states and support from the federal government for offshore wind’s supply chain buildout. 

US solar manufacturing will be put to the test this year when waivers on solar import duties from south-east Asia expire in June. Deloitte says domestic solar module manufacturing could triple in capacity this year and is on track to meet demand before the end of the decade. Manufacturing further up the supply chain, though, has been slower to catch up. The first US cell, wafer and ingot manufacturing plants are expected to come online later this year. 

Otness, from Skadden’s Houston office, said he expects investment to flow into US infrastructure projects due to government incentives and large pools of private capital.

“If you look at the big private equity funds out there, they’ve still got a tonne of money in their pocketbook and looking to deploy it,” he said. (Amanda Chu)

5. America will increase its dominance in LNG

The US in 2023 overtook Qatar and Australia to become the world’s biggest player in liquefied natural gas, according to initial analyst estimates. Bloomberg figures put the country’s full-year exports of the superchilled fuel at more than 91mn tonnes.

This year, the country will bolster its grip on the market. All going to plan, current US LNG capacity of about 11.5bn cubic feet a day should be boosted by two new projects — Golden Pass in Texas and Plaquemines in Louisiana — coming online this year.

And more projects will enter the development queue. Three reached the crucial final investment decision stage last year. And as many as six more — with a combined capacity of 6bn cf/d — could be greenlit this year, according to analysts at ClearView Energy Partners in Washington. 

But it is not all plain sailing for US LNG. Charif Souki’s ousting from Tellurian last month underlined how some projects continue to struggle. And the invective-strewn contractual spat between Venture Global and its customers, including BP and Shell, for withholding supplies will cause buyers to carefully inspect the terms of any new deals. (Myles McCormick)

Power Points

• Chevron has warned “harsh” energy policies in climate conscious California are harming earnings and investment

• Iberdrola has called off $8.3bn acquisition of US power utility PNM Resources

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and David Sheppard, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.