For years, OPEC has warned that not enough is being invested in future oil and gas production on a global scale. For years activists have been calling for an end to even that reduced investment.
Meanwhile, last year’s energy squeeze in Europe seems to have opened a lot of eyes to the fact that whether activists like them or not, oil and gas remain essential. And after almost a decade of underinvestment, the energy industry is once again spending on future supply.
Goldman Sachs reported this month that there were currently 70 large-scale oil and gas projects under development globally right now. That was up by a substantial 25% from 2020, although 2020 could hardly be seen as a normal year for investment decision-making in any industry except IT.
This is good news for those who consider energy security important. Per the investment bank, the seven-year-long underinvestment period led to a sharp decline in the resource life of future projects as well as the life of already producing fields. With a rebound in investment, this may yet change.
The question seems to be whether this investment is rebounding fast enough. In a recent article for GIS, the CEO of energy consultancy Crystol Energy, Carole Nakhe, noted that some observers are talking about a so-called investment gap.
While lacking in an official definition, the investment gap basically refers to the difference between what is being invested in an industry and what needs to be invested in order to secure a sufficient supply of what that industry produces.
Aramco’s chief executive Amin Nasser, who has repeatedly warned of an investment shortfall in oil and gas, has essentially been warning of an investment gap. Nakhe, on the other hand, argues that being the cyclical industry that it is, oil and gas is simply going through yet another cycle.
The energy transition and governments’ commitments to reduce emissions, notably from oil and gas production and use, has its part to play in this cycle. According to Nasser, it may play a bad part in it. According to Nakhe, the transition push will not be enough to discourage oil and gas investments just like that.
“Unless there is an official ban on such investment, investing in oil and gas will continue to be directed by the rate of return,” Nakhe wrote, and Goldman’s new-project information appears to support this.
The number of large-scale projects under development in the global oil and gas industry has risen from 57 in 2021 to 70 this year despite a marked intensification in transition commitments being made by governments and pledges by the financial industry that it will curb its exposure to oil and gas.
Indeed, it appears that despite all these pledges, finance is still available for oil and gas projects, not to mention governments’ willingness to subsidy petroleum-derived fuels to keep prices low and voters calm. We saw it last year in Europe and it prompted a strong response from transition advocates and activists.
Not only is investment in new oil and gas supply rebounding, but the rebound will last a while. According to Goldman’s analysts, the next five years would see an average annual capex spending increases of some 10% on average—a pretty healthy rate. It is also a rate that reflects rising demand, which many, including OPEC, the IEA, and Goldman, expect to reach all-time highs in the coming years.
That is happening, once again, despite transition commitments, despite rising EV manufacturing and sales numbers, and despite the continuing and urgent push to switch power generation from gas and coal to wind and solar as fast as physically possible.
Over the past few years, as the transition push gathered pace, many oil and gas executives began to worry about the long-term viability of the industry. Combined with pressure from activist investors, this worry must have contributed to the decision to spend less on future production.
Yet with the pandemic over and with the war in Ukraine a clear demonstration that nothing is certain in this world, least of all energy supply, the thinking might have started to change, especially with evidence that demand for oil and gas is strong and rising.
There is a problem, however. The problem is the reduced resource life Goldman notes in its report, which cites the head of EMEA natural resources research, Michele Della Vigna. According to her, that life was halved in the seven years since 2014 because oil and gas drillers invested less in exploration. And the less you invest in exploration, the less future supply you get to lock in.
That might mean a more permanent supply tightening for a while but, more than that, it would further boost OPEC’s share of global supply—something that U.S. industry executives have also warned about.
“The U.S. shale revolution is effectively over, and we’re going into shale maturity and actually shale decline after the middle of the decade, Della Vigna says.
“And all of this, I think, just gives back pricing power to OPEC. That is the only area in the world, especially in the Middle East, where there is meaningful remaining reserve life,” she adds. What this means is that oil prices may remain higher than many buyers would like for longer.
By Irina Slav for Oilprice.com
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