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US energy: what to watch in 2018

Oil production, trade, renewables and technology top our list of major questions facing America's energy industry heading into the new year

The US energy sector is undergoing a period of deep transformation: from booming oil and gas output to a revolution in the power mix and the rise of electric vehicles. These changes are raising a host of new questions for the industry. Here are a few we'll be watching closely this year.

1. How high will US oil production go?

America's crude output will grow again in 2018, but the pace is likely to slow from last year. Between December 2016 and end-2017, the US likely added more than 1m barrels a day of oil production - a return to pre-crash levels of growth. The final figures for the year aren't in yet, but analysts at Rystad Energy say US crude production capacity likely hit 10m b/d by end-2017, up from 8.77m b/d at the start of the year.

Heading into 2018, oil at $50-plus puts the established tight oil basins in the money, and could spur more investment in frontier shales like the SCOOP/STACK in Oklahoma. Moreover, companies are still pushing the limits of their completion techniques, which is pumping out more crude from each new well. These factors will keep momentum going.

But companies are more serious than ever about fiscal discipline, which should keep drilling in check—at least somewhat. The oil rig count has also stalled out at around 750 over the past couple of months, an indication that tight oil producers are being cautious about the recent price recovery, though if front-month WTI futures prices remain around $60 per barrel then another leg up in the rig count in the early part of 2018 can be expected. Analysts at Jefferies, an investment bank, say company guidance going into 2018 points to US production growth of around 0.6m b/d. This is roughly in line with the Energy Information Administration's expectation of 0.57m b/d of new output over the year.

2. Will US oil and gas exports extend their reach?

2017 was a breakout year for American oil, fuel and natural gas exports. Crude shipments averaged around 1.5m b/d over Q4, triple where they were a year earlier. Product exports were running at more than 5m b/d over the same period, around 1m b/d higher than the previous year. Gas exports also rose sharply thanks to higher pipeline exports to Mexico and the start up of new capacity at Cheniere Energy's Sabine Pass liquefied natural gas export facility.

With light tight oil set to expand, and the US' refiners taking in about as much of it as they're built to handle, higher exports in 2018 would seem all but inevitable. But there are reasons to be cautious. US light oil exports have benefitted over the last year from outages of similar grades in Libya and Nigeria. Rebounding output from both these countries will prove to be stiff competition for American producers and could blunt export growth. Some refiners have also complained of varying quality after several test runs of US crude imports and could move back to more familiar grades. Still, US oil is now deeply entrenched in the global crude trade and the country will remain an important supplier in 2018.

US LNG is set to hit the market in force in 2018. Five new export facilities are slated to start processing LNG for export, adding nearly 3bn cubic feet a day of new capacity, doubling the existing tranche.

On the trade front, the fate of the North American Free Trade Agreement will also be on the industry's agenda. The US, Mexico and Canada's energy sectors are deeply integrated and a dissolution of the deal could complicate cross-border trade and investment.

3. Can renewables continue to thrive under Trump?

The arrival of the Trump administration, and its pro-fossil fuel energy agenda, cast a shadow over the renewables sector. The administration's first year brought some negative headlines. Trump followed through on his promises to start the process of pulling out of the Paris climate accord. He also instructed agencies to roll back the Clean Power Plan. In reality, though, these measures were symbolic. The US' position in Paris had more to do with pulling others like China into the climate fight than driving down emissions at home, while the Clean Power Plan had never been enacted.

The industry's focus in 2018 will be elsewhere. A key issue early in the year will be the Trump administration's proposed "Grid Resiliency Rule", which would reward coal and nuclear plants for storing fuel on site at power stations, at the cost of renewables and gas. The Federal Energy Regulatory Commission is likely to decide on the new rule in the early months of the year. The solar industry, meanwhile, will be watching the Section 201 trade case, which could result in hefty tariffs being placed on imported solar panels, particularly from China. President Trump has been spoiling for a trade fight, and the solar panel spat could be his first major move towards protectionism. A decision is expected in January.

While the grid resiliency rule and other moves from the Trump administration have cast a shadow over the renewables sector, there are some strong tailwinds going into 2018. Important federal production tax credits for wind and solar survived the tax overhaul, which had been a major uncertainty for some developers in 2017. Costs also continued to fall and wind and solar are quickly approaching parity with their fossil fuel competitors, and are already there in many parts of the country. Moreover, while renewables have fallen out of favour in Washington DC, support is only growing at the local and state corporate level, where the wind and solar sectors have been a major driver of job growth. Utilities also remain convinced that the Trump administration's pro-coal moves are temporary divergence from a long-term path to a lower-carbon power system. These fundamentals should ensure another strong year for the industry in 2018.

4. How will technology transform the energy sector?

The industry will continue to see major changes from the proliferation of new technologies. Oil and gas producers will lift spending on new technologies as they look to bring some Silicon Valley innovation into the oil patch. More drilling and other processes will be automated. Machine learning and artificial intelligence will make the industry smarter and more efficient. Data will become a prized commodity for oil and gas producers.

Batteries too will continue to reshape the energy landscape. Lithium-ion batteries aren't new, of course, but their plunging costs mean they are being deployed widely, with major implications for transportation and the power grid. Electric vehicles are set for another year of banner growth in the US. At the same time, utilities across the country will start to look seriously at how batteries will be used to make the power grid smarter and more responsive, while helping to accommodate a growing share of intermittent renewables.

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