The outlook for U.S. shale and tight oil has improved notably, but at $715 billion, upstream investment has fallen behind electricity for the second consecutive year.

Global energy investment totaled $1.8 trillion last year with more than $750 billion going to the electricity sector, according to the recently released “World Energy Invest 2018” report by the International Energy Agency (IEA).

“For us, this is an important finding because traditionally the oil and gas sector has dominated the energy sector in terms of investment and the fact that electricity is now outpacing oil and gas is a good indication that there’s a larger trend occurring in terms of the electrification of the energy system, which we see as a long-term trend tied to energy transition,” Michael Waldron, an energy investment analyst for the IEA said during a webinar on July 13.

Waldron pointed out that the close relationship between the numbers could easily cause the two sectors to switch positions depending on upcoming trends.

In 2017, spending for oil and gas supply, in terms of capex, edged up by 2% despite electricity outpacing the upstream oil and gas sector. Alessandro Blasi, senior program officer for the IEA’s economics and investment office, even estimated that global upstream capital spending will see a 5% increase in 2018.

He credited this to oil and gas companies prioritizing capital discipline. And, he said upstream companies are more in favor of paying back investors, dividends and repaying debt through way of buyback of shares.

“We reached the conclusion that the upstream costs structure has been rebased with an important component of savings achieved,” Blasi said. “This is because companies have learned to do more with less.”

The IEA’s data showed that upstream oil and gas spending declined by $350 billion due to the collapse of oil prices three years ago even though oil prices have since doubled.

But, Blasi said U.S. shale has been the undisputed star of upstream investment.

“The oil and gas industry has been traditionally characterized by long-term projects with quite predictable production,” he said. “But the shale revolution has been changing this. We see that, due to technology and companies shifting focus to the shale sector, the shale share of total global investment is rising up.”

He said those investments have gone from about 5% in the previous decade to almost a quarter of global spending this year.

Due to the impact of shale, Blasi said investments in conventional oil projects will remain subdued. He predicted that new conventional projects will plunge in 2018 to roughly one-third of upstream investments, creating a multiyear low and ultimately raise concerns over the long-term adequacy of supply.

“It is important to note that we are moving from an industry that was relying, mostly, on one type of business model to a combination of two different models [with the] potential to add volatility to the market,” he said.

In 2018, the IEA predicted that the U.S. shale industry will reach an even bigger turning point by way of a 20% increase in investments. This will be supported by U.S. light tight oil production hitting a record increase of 1.3 million barrels per day, according to the report.

There has also been a shift in global investment of renewables.

While state-backed investments have accounted for a share of global investment, the report found that the real driving force has been government policies.

“The private sector plays, of course, a very predominant role in cleaner sources of investment,” Waldron said. “Nevertheless, even in investments which are privately led in the energy system, we see an increased role of policies which are providing the signals to make these investments.”

According to the report, more than 95% of investment in 2017—across all power sectors—was driven by some sort of long-term regulation or contracts for remuneration.

The report also showed that after several years of growth, global investments in renewables and energy efficiency has declined by 3% with potential to slow further in 2018. More precisely, investment in renewable power, which makes up two-thirds of power generation spending, dropped 7% in 2017.

“Such a decline in global investment for renewables and energy efficiency combined is worrying,” Fatih Birol, the IEA’s executive director, said. “This could threaten the expansion of clean energy needed to meet energy security, climate and clean-air goals.

“While we would need this investment to go up rapidly, it is disappointing to find that it might be falling this year,” he continued.

Mary Holcomb can be reached at mholcomb@hartenergy.com