The U.S. oil and gas story received a lot of media attention in 2012, and rightfully so. But as we move forward this year, investors should remember that energy is very much a global game. World energy demand and production can dramatically affect demand and production at home, so it makes sense to keep an eye on the big picture. Today, we'll take a look at three global trends to watch this year.
No. 1: Rollback of subsidies
Earlier this year, the IEA estimated that governments worldwide spent $523 billion subsidizing fossil fuels in 2011. That number is 30% higher than what it was in 2010. The agency points out that the majority of these subsidies occur in countries in Africa and the Middle East, but the issue certainly isn't limited to those regions .
Nor are the effects of these subsidy programs limited to those regions, either. Consumption increases when governments subsidize these resources, and as demand pushes up prices, the cost of subsidies wreak havoc on economies the world over. It is particularly damaging to countries that import a lot of energy.
Jordan, for example, is in the midst of doing away with its subsidy program. The country imports virtually all of its energy and can no longer afford to subsidize it. Under pressure from the International Monetary Fund, and in the face of potential uprisings, Jordan slashed fuel subsidies in November. At the end of December, the country announced it planned to raise electricity prices .
Dubai has already proven this approach can work. In 2008, the emirate increased rates for electricity for the first time in 10 years, and did so again in 2011. The high rates have encouraged consumers to use less, and electricity rates have dropped 6% annually. Energy efficiency is expected to cut consumption by 30% by 2030.
No. 2: Consolidation
In a way, consolidation in the oil and gas world has been happening since the Supreme Court smashed Standard Oil into 34 pieces in 1911, as those pieces slowly put themselves back together in the form of supermajors such as ExxonMobil (NYSE: XOM ) and national oil companies such as Saudi Aramco. But there is a particular pressure on the business now, as cheap oil is either gone or in the hands of foreign governments. Production at the super majors such as Exxon and Chevron (NYSE: CVX ) is declining, and growing shareholder return through the drill bit is becoming increasingly difficult.
Difficult oil is still out there, though, and super majors have the cash to make it their own -- if they work together. A report on the industry from IBM (NYSE: IBM ) hints at what may be to come:
Tighter controls on oil and gas operations will require a new approach to sharing risks. The emergence of industrywide risk sharing funds, more capital security/insurance and compliance requirements will probably result in limited number of smaller producers and hence presence of fewer players. What's more, over regulation could hinder the development of oil and gas solutions and ultimately restrict supply – at worst, leading to energy crises at local levels or even on a global basis. And in any case, governments will remain unable to "legislate away" human error .
Expect acquisitions of companies with exceptional oil assets. Increasingly, such deals may be made in North America. Such companies as EOG Resources (NYSE: EOG ) with great numbers coming out of the Bakken and the Eagle Ford shale are potential targets.
No. 3: Resource nationalism
Resource nationalism itself is nothing new, and there is a long history in the oil industry of governments appropriating local reserves from private companies in an effort to increase revenue and energy security. What has changed is that now governments are buying up reserves all across the globe and national oil companies are quickly building an international presence. China is leading the way, spending more than $200 billion over the last eight years on foreign acquisitions and joint ventures. Suddenly, who owns what and where is increasingly important.
Canada, which essentially privatized its biggest oil company, PetroCanada, in 2009 by merging it with Suncor (NYSE: SU ) , put this issue in the spotlight when it allowed CNOOC (NYSE: CEO ) to acquire Nexen at the very end of 2012. As it becomes more important for oil companies to work together to produce unconventional and technically challenging oil sources, who gets to play and who sits on the bench will increasingly be a decision made by local legislatures.
The biggest energy story in 2013 may well be the one no one is expecting, but keeping an eye on the shifting patterns of global consumption and production can give us important insight into the long-term energy picture.