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Energy Equipment & Services

If you want to make money in a gold rush, the most reliable way is to sell picks and shovels

Picks and Shovels

The old adage that, ‘if you want to make money in a gold rush, the most reliable way is to sell picks and shovels’ is never more appropriate than it is today. In the days of the California and Alaska gold rush there were relatively few miners who struck it rich but the providers of mining equipment were the first to benefit.

The providers of equipment and services to the commodities sector are not only busy supporting the search for new finds, they are also benefiting from the fact that ageing infrastructure is in need of capital expenditure to make up for the lack of investment of the past.

Our Energy Equipment & Services themed commentaries cover those companies benefiting from the surge in energy related expenditure with companies operating in the following core industry sectors:

     
  • Oil equipment and services
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  • Industrial engineering
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  • Support services
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  • Electronic and electrical equipment
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  • Power and energy markets, including renewables.

With a focus on predominantly UK & US listed companies

Increasing demand for oil over the long term but declining output

The effective and efficient supply of power and energy remains essential to support the world’s economy. Despite short term price concerns, oil demand is expected to increase over the long term given the rapid growth in energy consumption, primarily from the emerging market economies of Brazil, Russia, India and China (BRIC), and continuing demand for energy in the West. Energy demand in developing countries is growing at a rate of about 3.4 per cent a year (Financial Times 29th October 2008).

Support services have a key role to play in ensuring efficiency of supply and therefore specialist operators with a strong market position and unique technology are in high demand.

Notwithstanding short term price falls, the strength of the oil and commodity sectors over recent years means that significant amounts of cash are being channeled into improving facilities to catch up with historical under investment. The replacement cycle and search for oil reserves in deeper and harsher environments is also driving demand for infrastructure in the offshore oil and gas markets.

Amid fierce competition to secure supplies and to meet demand, spending on energy infrastructure is set to rise sharply over the coming years with the International Energy Agency (IEA) estimating that this could total $22,000bn by 2030, investing US$350bn each year until then.

The IEA has reported that while market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over, doubling its long-term price expectation from last year’s US$108 a barrel for 2030 and assumes oil prices will rebound from the current US$60-US$70 a barrel to trade, in real terms adjusted by inflation, at an average of more than US$100 a barrel from 2008 to 2015. The IEA has come to this conclusion because it believes companies will struggle to pump enough new oil to offset the steep production declines of the world’s older fields. The IEA estimates that by 2010 oil companies will have to commit to projects producing almost as much oil as Saudi Arabia (approximately 7m barrels a day) if the world is to avoid a supply crunch by the middle of the next decade.

Output from the world’s oil fields is declining at a natural rate of 9%, the IEA found, following the most comprehensive review of its kind. This decline rate is curtailed to 6.7 per cent when current investments to boost production are made. However, even with such investments, the decline rate worsens significantly to 8.6% by 2030.

New technology is also key

The shortage of big new oil and gas reserves has driven the need for new technologies to make the most of existing assets.

It has been reported that each percentage point increase in global extraction produces 10bn barrels of oil per year; a significant number when daily world consumption is less than 80m barrels.

Renewable energy has a big role to play

While biofuels and other renewable energy technologies are unlikely to do little more than slow down growth in demand for oil in the short term, ‘viable’ alternative sources of energy could also have a key role to play, with China and India already increasing expenditure in alternative energy solutions.

Driven by public opinion and legislation, Governments around the world are becoming active supporters of alternative energy solutions and offer meaningful financial incentives in support of new alternatives.

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