A brief summary of the past 12 months in world energy: Boom Goes Demand! Russia Invades Ukraine! Europe Scrambles! Exploration Struggles! Majors Get Greener! Climate Gets Compensated! Crude Gets Capped! Here Comes 2023! Identifying the major energy stories of 2022 poses no problem. Overall, it was a year of big headlines, frequently with exclamation points. Now those events have pushed the world and the energy industry into a new year peppered with question marks.
“Energy security is now at the top of most people’s mind. Bottom-line is, the world got a lot more complicated in 2022,” said Kenneth Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy and director of the master of energy economics program in the school’s economics department.
Last year began with rising world energy demand that led to a surge in prices, especially for gasoline and other fuels. Combined with supply restrictions, those higher energy prices contributed to rapidly growing global inflation. Medlock said the post-pandemic rebound was predictable and had no dire, longer-term implications.
“It all really started in 2021 when economies began moving again. As that activity matriculated, it resulted in higher demand. Eventually there was a spike, and higher prices. It was completely expectable,” he noted.
What happened next was both surprising and dire, unpredictable for most of the world, and with enormous longer-term implications.
“Putin threw a massive boulder into the pond,” Medlock said.
In late February, Russian troops pushed into Ukraine with the apparent objective of destabilizing and collapsing the Ukrainian government. Europe responded with a series of sanctions leading to a partial embargo on Russian energy imports.
Russian major Gazprom then curtailed shipments through the Nord Steam 1 pipeline, an important gas link to Germany and the rest of Europe. Germany had earlier rejected an operational permit for the parallel Nord Stream 2 line.
European countries subsequently raced to fill their natural gas storage facilities ahead of winter, leading to an escalation of LNG prices and other energy prices.
“Unfortunately, we’re going to be dealing with this for a while,” Medlock noted.
“As we move into 2023 and towards the winter of 2023-24, there’s going to be the need for Europe, for Germany, to begin filling natural gas storage again. That’s going to happen without Russian gas, which is very different from 2022,” he added
“We should be OK through February. Things look different when we get to March. The governments in Europe are going to be focused on rebuilding inventories as we exit the winter,” Medlock said.
In September, undersea explosions hit both Nord Stream pipelines and resulted in serious gas leaks. Investigators later reported finding traces of explosives near the blast sites, indicating deliberate sabotage.
By year-end, Europe appeared fortified to withstand anything beyond an exceptionally brutal and prolonged winter, although energy supply scarcity caused pain for consumers and headaches for industry.
“Industrial demand’s off by about 30 percent in Germany. That’s because they’ve shuttered a lot of activity. That’s not going to be easy to bring back,” Medlock said.
“It’s one of the biggest take-aways from 2022: The hangover is going to last,” he observed.
Exploration began the year on a positive note with oil discoveries off Namibia. TotalEnergies found about 84 net meters of pay in a Lower Cretaceous reservoir with its Venus 1-X well, roughly 250 kilometers offshore southern Namibia.
Shell reported a discovery in the same Orange Basin vicinity in February with the Graf-1 well, followed by a success on its La Rona-1 prospect, with confirmed hydrocarbon pay at multiple levels.
Medlock said the outlook for future exploration success “depends on where you are” in the world.
“On the exploration front, there’s not a shortage of targets. There are a number of discoveries we’ll see, but the focus shifts away from North America and Europe,” he noted.
“For new exploration in the U.S. Gulf of Mexico or the North Sea, you probably aren’t going to hear much there,” he said.
As 2022 progressed, a now-familiar exploration pattern emerged, with new discoveries coming in established prospect areas. Exxon notched more finds off Guyana and the industry hit additional successes off Brazil and Angola and in the Gulf of Mexico. Gas potential offshore Cyprus drew attention following activity by Exxon and Eni.
“To me, the biggest domino in that box is Guyana,” Medlock said.
Investment continued to trickle into global exploration, with investors clearly preferring lower-risk drilling in established field regions with significant production potential.
“That’s the (investment) dollar that has the clearest line of sight, because you have a lot of information,” Medlock noted.
In late 2022, energy research and consulting firm Wood Mackenzie issued a report titled “The Silver Linings Playbook,” highlighting five key developments in the energy and natural resources sectors.
It included the entry “Lightbulb Moment: Investors adopt a more realistic attitude to investing in fossil fuels.”
“The shift in approach reflects both the complexity and the necessity of securing an orderly energy transition,” said Kavita Jadhav, WoodMac research director, corporate research.
“The past year has made abundantly clear that energy supply and demand need to move in sync for economic stability and minimal price volatility,” Jadhav said.
What effect climate concerns will have on future oil and gas exploration remained a question mark, but worries about energy security and adequate supply appeared to push the pendulum back toward continued drilling.
“Even in the most aggressive scenario, the one the International Energy Agency came out with last year, there would be no more investment in new fields but there would still be investment in developing existing fields,” Medlock said.
A more restrictive approach posed by some climate activists called for no further exploration spending or upstream investment in order to achieve a maximum 1.5-degree Celsius limit on warming.
“That scenario is a very specific outcome, and we’re not on that path,” Medlock noted.
Mergers and Acquisitions
Oil industry mergers and acquisitions in 2022 were almost all about positioning, in two flavors – strengthening producing positions or acquiring lower-carbon energy assets.
BP agreed to acquire U.S.-based biogas producer Archaea Energy Inc. in a transaction valued at $4.1 billion. Shell arranged to acquire Danish renewable natural gas producer Nature Energy Biogas A/S for around $2 billion. Those deals reflected a trend of large energy companies diversifying into sustainable energy production.
In a move to bolster its LNG position, EQT Corp. announced plans to acquire Quantum Energy and THQ Appalachia I LLC, plus associated pipeline infrastructure, in a $5.2 billion transaction. Diamondback Energy Inc. agreed to acquire privately-held FireBird Energy LLC in a $1.6 billion stock-and-cash deal, enabling it to grow operations in the Permian Basin.
Oil and Geopolitics
The COP27 climate conference played out in Egypt in November with surprisingly little movement on climate action or greenhouse emissions, but a pronounced focus on financial response to the effects of warming.
“I wasn’t all that surprised by the outcome, but it’s come down to, ‘How do you help smaller nations, especially small island nations, cope with the effects of climate change?’” Medlock said.
“There was a re-commitment to the methane standards, which was good,” he noted.
Countries continued to refine and revise their NDCs, nationally determined contributions under the Paris agreement, with an emphasis on future net-zero goals but mostly without process specifics or interim-goal commitments. That gives them more flex room – and less accountability for meeting near-term emissions targets.
During the course of 2022, analysts projected the year-end world crude oil price at anywhere from $125 to $200 per barrel. But by December, Brent crude had settled back to around $80, close to year-earlier levels. Upward price pressure on natural gas was longer lasting.
“The natural gas situation in Europe has major ramifications in Asia. You could actually see a lot of upward pressure on LNG and, because of that, a lot of price volatility. And that will mean a lot of switching in China and India to coal,” Medlock said.
Effective December 5, the Group of 7 (G7) – nations with advanced economies – placed a $60/barrel price cap on Russian oil exports. Objectives included reducing Russia’s oil revenues and alleviating any pressure for higher oil prices.
But when constraint is placed on a market, prices tend to go up, not down, Medlock observed. And European sanctions coupled with other effects of the Ukraine conflict could reduce Russian oil shipments.
“If it shuts in some Russian crude – which it could – world oil prices would go up,” Medlock said.
“The countervailing factor there is the world economy,” he noted. “If the global economy slips into a recession, you’ll see downward pressure on commodities. You’ll see downward pressure on trade.”
China and India are not subject to the price cap, and geopolitics has altered the pattern and prices of world energy delivery. News service Reuters reported in December that India was already buying Russian oil below the price-cap level, and that Russia was seeking alternative markets for as much as 1 million barrels/day.
“The thing that’s interesting is, if Russia wants to redirect that flow, the problem is logistics,” Medlock observed. “So, the impact of the cap is muted, but it’s not completely muted.”
Lastly, in mid-December, a team at the U.S. Lawrence Livermore National Laboratory reported a breakthrough in fusion energy, successfully recording a net energy gain from a laser-driven reaction. That held the possibility of altering the world’s energy landscape – someday.
Chances for a global recession were just one of the energy question marks heading into 2023. As the Ukraine conflict approached its 11th month, fallout from the Russian invasion continued to dominate the global energy picture.
“That’s why I say Putin threw a boulder into the pond,” Medlock explained.
“The ripple effects are massive.”