‘Chaos Will Intensify’ as Oil Investment Crisis Threatens Supply

Last month Houston hosted the 23rd World Petroleum Congress with more than 5,000 attendees from 70 countries. After a one-year postponement due to the global pandemic, energy leaders from across the globe gathered to discuss the future of energy.

And the tone of the discussion was sobering.

Following on the heels of November’s COP26 meeting in Glasgow, there was recognition that political and societal pressures are shifting the energy sector and the industries in it. But there was widespread concern that the expectations underlying these pressures for change were unrealistic. That those pushing hardest for change lacked a fundamental understanding of what transforming the global energy sector truly entailed, what it would look like when it was complete and the dangers looming from getting it wrong.

“Energy security, economic development and affordability imperatives are clearly not receiving enough attention,” warned Amin Nasser, CEO of Saudi Aramco.

“Until they are, and unless the glaring gaps in the transition strategy are fixed, the chaos will only intensify. So the urgent new quest for our industry is to chart a course that will continue to realistically meet the world’s rising energy needs – reliably, affordably and sustainably.”

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Last month Houston hosted the 23rd World Petroleum Congress with more than 5,000 attendees from 70 countries. After a one-year postponement due to the global pandemic, energy leaders from across the globe gathered to discuss the future of energy.

And the tone of the discussion was sobering.

Following on the heels of November’s COP26 meeting in Glasgow, there was recognition that political and societal pressures are shifting the energy sector and the industries in it. But there was widespread concern that the expectations underlying these pressures for change were unrealistic. That those pushing hardest for change lacked a fundamental understanding of what transforming the global energy sector truly entailed, what it would look like when it was complete and the dangers looming from getting it wrong.

“Energy security, economic development and affordability imperatives are clearly not receiving enough attention,” warned Amin Nasser, CEO of Saudi Aramco.

“Until they are, and unless the glaring gaps in the transition strategy are fixed, the chaos will only intensify. So the urgent new quest for our industry is to chart a course that will continue to realistically meet the world’s rising energy needs – reliably, affordably and sustainably.”

Nasser reminded the audience that, as 18th-century U.S. President John Adams put it, “facts are stubborn things.”

We Are the Solution, Not the Problem

Those facts were also on the mind of panelists John Hess, CEO of Hess Corporation and Joseph McGonigle, secretary general of the International Energy Forum.

“At the end of the day, to have an orderly transition, oil and gas are part of the solution, not the problem,” Hess said, according to an S&P Global Platts report. “Our carbon footprint is 10-percent less now than 10 years ago. The real takeaway is that the energy transition will take a long time, cost a lot of money and need technologies that don’t exist. We need climate literacy, energy literacy and economic literacy.”

McGonigle pointed out that the decisions policymakers and industry leaders are making today will dictate how this energy transition unfolds, and he is concerned by what he sees. IEF and IHS Markit issued a new report at the WPC entitled, “Oil and Gas Investment Outlook: Investment Crisis Threatens Energy Security.”

The IEF is a multilateral organization that represents 71 countries. Where the International Energy Agency represents consumers and OPEC (and OPEC+) represents producers, the IEF includes both consumers and producers. And, McGonigle explained, increasingly it is a place for developing countries to dialogue on energy issues with the developed world. And it is in the area of energy security that the developing world in particular faces significant threats.

Regular readers might recall that last February, I wrote about IEF’s December 2020 report, prepared together with Boston Consulting Group, on the subject of underinvestment in oil and natural gas. At the time, demand had plummeted due to COVID and no one was too worried about supply. Fast-forward a year with rebounding demand, and you didn’t have to be clairvoyant to anticipate what we’re seeing now.

Today’s higher energy prices, inflationary pressures and volatility are driven largely by this underinvestment in upstream projects. In their 2021 report, IEF suggests that annual upstream investment needs to increase to $484 billion in 2025 and $523 billion in 2030 to keep supply and demand balanced. In 2021 they report annual upstream investment at $341 billion.

At the same time, the access to capital for these projects is becoming more difficult. This is partially due to shifts in sentiment toward oil and gas investment, but also due to the low-price environment since 2015 and persistent underinvestment in long-cycle projects since the “shale boom.”

Unconventional resources, particularly in the United States, will remain important contributors to global supply, but the report sees the industry being much more disciplined with its short-cycle investments.

Investments in the near term – this year and next – are essential to assure adequate supplies in the next five to six years. And the focus will be investment in new “projects with access to existing infrastructure.”

The IEF is realistic that as the industry plans and finances these new projects, it needs to address the policy and societal pressures driving toward ESG objectives. For this to realistically work, the report calls for “transparent and standardized greenhouse gas emissions data,” so that the industry players are using the same measures and the projects can be evaluated accordingly.

Supply Shortage and Energy Security

Finally, the IEF finds that failure to make the investments indicated by their analysis will increase volatility in energy prices, which hurts both producers and consumers. Relying on short-cycle investments and underinvesting in long-term supply creates uncertainty in the marketplace, leading to higher prices. This disproportionately impacts less-developed economies, which are typically less efficient in energy used per increment of GDP growth, and it decreases global energy security.

If there was positive news from WPC, it was that the oil and natural gas industry is able to contribute positively to the continued evolution of the energy sector. And it is clear that oil and natural gas will remain a substantial source of supply for decades.

Facts are indeed stubborn things.

After reading Nasser’s remarks, I searched that quote from John Adams. According to the citation I found, it reads: “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”

Nowhere is that more true than in our discussion of the energy transition.

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