Are years of upstream oil and gas underinvestment and under-exploration finally catching up with the world? Is the hope of avoiding a climate catastrophe now a lost cause? Can the global energy industry deliver adequate, affordable energy to meet the world’s future needs?
Is the word in an energy crisis?
Annually at midyear, a number of organizations publish overviews of the global energy picture. Based on those reports, the world does not appear to be in a systemic energy crisis in 2022.
That’s the good news.
The bad news is that a global crisis might be building for the future.
Fatih Birol, executive director of the International Energy Agency, summed up reasons for concern in the IEA’s World Energy Investment 2022 report, issued recently.
"Because of a lack of interest in exploration, the amount of additional crude oil likely to be discovered in the world has fallen from 1 billion barrels to 350 million barrels"
“Current market and policy signals are not incentivizing the major reallocation of capital to low-carbon power and efficiency that would align with a sustainable energy future. In the absence of such a shift, there is a growing possibility that investment in fuel supply will also fall short of what is needed to satisfy growing demand,” Birol observed.
“And to meet sustainable development goals, much more investment is needed in the regions that face the highest economic and financial constraints, such as in sub-Saharan Africa,” he wrote.
Birol himself has labeled the world’s current energy situation a “crisis” in widely reported public remarks in July.
“The world has never witnessed such a major energy crisis in terms of its depth and its complexity. I believe we might not have seen the worst of it yet,” Birol said at the Sydney Energy Forum in Australia.
Lack of Exploration
Findings from recently released studies might not necessarily back up the “crisis” evaluation – although circumstances are starting to look a little shaky.
Energy research and business intelligence company Rystad Energy in Oslo released an analysis at the end of June showing a roughly 9-percent year-to-year decline in its global recoverable oil estimate, and issued a startling re-evaluation of the world’s undiscovered oil resources.
“Looking at the longer-term picture, Rystad Energy has updated our estimates for total undiscovered oil from 1 trillion barrels in 2018 to 350 billion barrels in our latest report, due to a rapid collapse in investor appetite for exploration exposure, leading to fewer government leases,” it stated.
Again: Because of a lack of interest in exploration, the amount of additional crude oil likely to be discovered in the world has fallen from 1 billion barrels to 350 million barrels, in Rystad’s analysis.
“This downward revision is good news for carbon compliance but could have negative consequences for global energy security, particularly if electric vehicle adoption falls short of expectations,” Rystad observed.
Per Magnus Nysveen, Rystad’s head of analysis, said, “While the drop in oil availability is positive news for the environment, it may threaten to further destabilize an already precarious energy landscape.
“Energy security is a matter of redundancy – we need more of everything to meet the growing demand for transport – and any action to curb supply will quickly backfire on pump prices worldwide, including large producers such as the U.S.”
Patrick Rutty, director of global research at energy data and analytics firm Enverus, noted that exploration in NOCAR countries – producers other than OPEC countries, Canada, America and Russia – recently hit a 70-year low.
“Although there has indeed been a stunning decline in exploration drilling worldwide, it still looks to us, based on existing production, sanctioned and likely-to-be-sanctioned projects, and estimates of infill and tie-back development drilling, that supply will remain more or less flat through around 2030,” Rutty said.
The IEA has developed potential scenarios for world energy output, including an “Announced Pledges” outlook that includes the total effect of announced climate targets and actions around the world, and a more conservative “Stated Policies” scenario that assumes not all of those climate goals will be met.
Rutty noted that the results of climate-action efforts and Europe’s embargo of Russian oil aren’t fully predictable at this point, although both could have a meaningful effect on energy supply.
“If the world makes no more progress reducing oil demand and the Russian barrels truly stay off the market, then we could have a problem toward the back half of this decade. But if demand is even halfway between the IEA’s Stated Policies and Announced Pledges scenarios, then we’ll have more global supply than we need,” Rutty said.
“And that’s when things might get really exciting locally/regionally, with barrels that are some combination of low-cost, low-emissions and strategically sourced forcing other, inferior barrels out of the supply stack,” he added.
BP’s 2022 Statistical Review of World Energy, its 71st edition, also cited good news and bad. Global primary energy production increased by almost 6 percent in 2021, reflecting the world’s post-pandemic economic recovery.
But the energy review “also highlights that the pronounced dip in carbon emissions in 2020 was only temporary: carbon-equivalent emissions from energy including methane, industrial processes and flaring increased by 5.7 percent last year,” noted Spencer Dale, BP’s chief economist.
Renewables, excluding hydroelectric, continued to increase their share in global power generation with strong expansion in solar and wind energy, BP reported. Renewables’ share in power generation reached almost 13 percent in 2021, now considerably higher than nuclear energy at 9.8 percent.
“The increase in primary energy between 2019 and 2021 was entirely driven by renewable energy sources. The level of fossil fuel energy consumption was unchanged between 2019 and 2021, with lower oil demand offset by higher natural gas and coal consumption,” BP found.
‘Disruption’ versus ‘Crisis’
In the current global energy situation pictured by recent reports, “disruption” might be a better description than “crisis.” Post-pandemic energy demand has rebounded far faster than supply, causing fuel-price disruptions. Europe’s embargo of Russian energy has created a localized disruption in supply, bringing worries about winter natural gas availability.
While the fundamentals of world energy supply haven’t changed, and supply is projected to grow in most areas, a fundamental and inflationary increase in costs has emerged as a concern.
In evaluating capital investment in energy in its World Energy Investment report, the IEA noted:
“Almost half of the additional U.S. $200 billion in capital investment in 2022 is likely to be eaten up by higher costs, rather than bringing additional energy-supply capacity or savings. Costs are rising due to multiple supply-chain pressures, tight markets for specialized labor and services, and the effect of higher energy prices on essential construction materials like steel and cement.”
In the longer term, a larger concern is that the energy industry and the world as a whole aren’t making the investments they need to make in the areas where they need to make them.
“Overall, today’s oil and gas spending is caught between two visions of the future: It is too high for a pathway aligned with limiting global warming to 1.5 degrees Celsius but not enough to satisfy rising demand,” the IEA reported.
The true future energy crisis will emerge if the world cannot continue to meet its total energy demands, does not extend the availability of power and fuel to energy-starved areas of the globe, and fails to avoid the most serious effects of climate change – the worst of possible worlds.