“Insufficient investment in oil and gas production threatens to undermine energy security, and this could slow down progress towards climate goals,” says the International Energy Forum (IEF) and S&P Global Commodity Insights report “Oil and Gas Investment Outlook”. The authors repeat many times – “energy security has again become a political strategic imperative.”
The material was prepared by the Institute for the Development of Technologies in the Fuel and Energy Complex.
The report of the International Energy Forum and S&P Global Commodity Insights “Prospects for investment in oil and gas production” makes a paradoxical conclusion: for a successful energy transition, that is, the abandonment of fossil fuels, urgent investments are needed in the exploration and production of this same fossil fuel.
The past year 2022 clearly showed the impossibility for modern civilization to do without oil, gas and coal. Fossil fuel company’s profits doubled, while wind turbine manufacturers suffered billions in losses. Only the urgent restoration of coal-fired generation and the expansion of the use of gas turbines could prevent large-scale lockouts in China, Europe and the United States. The slogan “RES at any cost” has been replaced by the strategic imperative “everything for the sake of energy security”.
This security, the authors write, is threatened by price and investment volatility. “The vicious cycle of volatility and investment remains a key risk in the coming decade,” the report says, “with high price volatility deterring investment and delayed investment potentially fueling price volatility.”
The authors see a way out of this classic mechanism of market fluctuations almost in the state management of the industry: “History has shown that without market management, boom-bust price cycles prevail, which damage the economy, especially in developing regions. In addition to active and ongoing dialogue, governments can help by providing regulatory and policy certainty….”
“Consumer countries can support markets by sending clear signals about future demand, building and maintaining sufficient stocks, maintaining long-term supply contracts and preventing restrictive policies.” The report does not decipher the concept of “prohibitive policy”, but one can guess that we are talking about the war against fossil fuels by the US, UK and EU administrations. The WEF is based in Riyadh, and the oil monarchies of the Gulf can afford some truth.
Further, the authors of the report write:
“Operators need a certain level of assurance and regulatory certainty to invest in capital-intensive, long-cycle projects… In addition, governments should base policy on realistic energy demand forecasts and ensure adequate and affordable energy supply during the transition period.
The energy industry needs more certainty from policymakers on penalties and incentives for future energy investment to ensure that sufficient capital is mobilized for all technologies to address climate change. This requires public policy based on realistic assumptions about demand and risks of disruption. In particular, governments need to ensure that the assumptions do not underestimate the growth in energy demand coming from 80% of the world’s population in developing countries. …
All it takes is capital investment, market transparency and an open dialogue between producers and consumers.
The call for a “dialogue between producers and consumers of energy resources” fundamentally contradicts the principles of a free market with competition between producers and consumers seeking the lowest price in the market. Such “dialogues” met in abundance in history in the middle of the last century, losing in the end to market mechanisms.
However, the current situation is different. Decades of faith in the “invisible hand of the market” have led Europeans, and not only them, to the need to overpay for LNG supplies, in the market of which China plays the main role today, not constrained by market dogmas and having entered into multi-year contracts for LNG supplies even from plants that have not yet been built. Firms based in China account for approximately 15% of all contracts that will start supplying LNG before 2027, according to BloombergNEF analysis. And Shell Plc’s annual LNG outlook report says that China is transforming from a fast-growing import market into a more flexible country with an increased ability to balance the global LNG market. According to a January report from ENN Energy, the country is estimated to have resold at least 5.5 million tonnes of LNG last year. This is equivalent to approximately 6% of the total spot market.
The authors of the report believe that the main problem today is the uncertainty in the behavior of oil and gas companies: will they allocate enough investments to increase production?
As long as oil prices remain above $70 a barrel, there are enough lucrative oil and gas projects to meet demand for the next decade, the report says. After decades of weak stock market performance and free cash flow, oil and gas companies now outperform every other major industry. This has shifted the main constraint on investment from the availability of capital to the willingness of producers to invest.
An unwillingness to increase and sustain investment in oil and gas production could lead to repeated shocks caused by a mismatch between the pace of transition to renewables and rapidly declining fossil fuel supply as a result of underinvestment and geopolitical events. Lack of energy security could even lead to government intervention in the energy market, experts at the IEF warn.
The chart below shows capital expenditures since 2010. From 2015 to 2021, investment in oil and gas is lower than in 2010.
The drop in the number of wells in 2020 is particularly revealing. It should be noted that the number of wells in OPEC (probably meaning OPEC+) is about two and a half times less than in the United States, and the organization produces about twice as much oil.
Oil and gas workers can be understood. The past two years have been years of their triumph. While the S&P 500 is up just 2% since the start of 2021, the S&P global oil index is up 60%. Notably, the S&P Global Clean Energy Index is down 29% from January 2021.
However, between 2013 and 2021, the S&P Global Oil Index fell 10% compared to a 178% increase in the S&P Global Clean Energy Index, a 169% increase in the S&P 500 and a 368% increase in the S&P 500 Information Technology Sector Index.
Energy stocks perform strongly in 2021-22 do not cover decades of low rates.
However, the authors of the report hope that “the revival of the energy security imperative will help break the vicious circle of thinking about energy abundance” and encourage oil and gas workers to increase investment.
Uncertainty in demand remains a limiting factor. From various long-term projections, the difference between oil demand at its highest and lowest for 2050 is 80 million barrels per day, the report said.
Long-cycle projects, which will be commissioned in the mid-2020s, are designed for production during the 2030s, and often beyond the 2040s. These projects are currently facing a wide range of long-term price scenarios and growing uncertainty. This means that what may be profitable today may not be profitable tomorrow.
Operators are seeking to mitigate this risk, the report says, by choosing to invest in small, phased projects with easy access to existing infrastructure and the fastest possible implementation.
The summary of the report is that oil and gas capital spending in 2022 rose 39% yoy to $499 billion, the highest level since 2014, but well drilling remained below pre-pandemic levels. The number of drilling rigs in 2022 increased by 22%, but this is still 10% below the level of 2019.
To ensure adequate global supply, analysis and benchmark prices in commodity and energy markets, annual investment in oil and gas production should grow by 28% by 2030 to reach $640 billion.
Since the IEA, the energy mouthpiece of the OECD countries, also participates in the work of the MEF, the prospects for a 28% increase in investment in oil and gas should not be considered completely unrealistic. However, in 2021, the top 25 fossil fuel NGOs generated about $4.5 billion in revenue, more than four times the amount raised by the top 25 either pro-hydrocarbon or nuclear NGOs. Shell’s board of directors has been sued for failing to manage the climate risks the company faces. Analysts have counted 125 ways the Biden administration and Congressional Democrats are making oil and gas production difficult. If a war starts between the “greens” and the “blacks”, of course, the “blacks” will win it, because solar-powered tanks cannot drive, but oil price forecasts are at 200-250 $ / barrel. do not seem more fantastic than a 28% increase in investment in oil and gas.
One of the highlights of the report is a drop in production in non-OPEC countries without additional drilling. Production is estimated to fall by 9 million barrels per day by 2026 and by 17 million barrels per day (or 31%) by 2030.
The chart on the right is begging to be called “goodbye slates”. However, it fundamentally contradicts the optimistic forecast of the American EIA for the next two years.
In global oil and gas, much will depend on the US presidential election in 2024. The Republicans are waging an uncompromising war against the ESG because of the main point of this creed – emissions.
To be an optimist, if you wish, you can count as the first sign of the oil and gas spring a message from the UK that 52% of hazardous emissions of microparticles from transport are not related to the exhaust pipe, but to the abrasion of tires on asphalt. Everyone immediately accused Downing Street of wanting to impose a tax on tires, with owners of heavier electric vehicles having to pay more. The strongest blow to electric cars, previously declared the holy saviors of cities from harmful emissions.
In Europe, car manufacturers realized that further concessions to the “green demons” from the European Parliament would lead to the destruction of the industry, and expressed “serious concern” about plans to introduce Euro-7 standards.
CO2 campaigners are horrified to note that last year China approved the construction of another 106 GW of coal-fired power plants, four times more than a year earlier.
Fossil fuels don’t give up, the end result of the battle against greenery doesn’t…
