The oil and gas sector needs hundreds of billions of dollars in investments to be able to meet the increase in global demand. The rise in oil prices is linked to the decreasing volume of these investments, which is constantly emphasized by concerned officials in oil-producing countries.
The issue of investments in the oil sector was on the agenda of the Jeddah Summit for Security and Development, which was held in Riyadh on July 16, in the presence of US President Joe Biden, who called on OPEC countries to increase their production in order to contain the repercussions of the rise in oil prices.
During the summit, Saudi Arabia took the opportunity to speak frankly about policies promoting an “urgent abandonment of fossil fuels,” calling for a balance between environmental requirements and energy security.
In his speech, Saudi Crown Prince Mohammed bin Salman reiterated that global challenges “require dealing with climate change realistically and responsibly to achieve sustainable development by adopting a balanced approach, with a gradual and responsible transition towards more sustainable energy sources.”
He stressed the importance of continuing to pump investments in fossil energy and its clean technologies over the next two decades to meet the growing demand globally, with the importance of reassuring investors that the policies that are adopted do not pose a threat to their investments to avoid their reluctance to invest, ensuring that there would be no shortage of energy supply that could affect the global economy.
Fossil energy
Despite the remarkable progress in the uses of alternative energies in many applications such as electricity, transportation and industry, they do not constitute long-term solutions, and therefore fossil energy will remain an essential part of the global energy mix for the foreseeable future.
According to IHS Markit, a consulting firm, this lack of investment threatens to trigger several energy crises during the energy transition phase, anticipating recurrent price shocks resulting from the discrepancy between the slow shift in energy consumption patterns on the one hand, and the erosion of oil and gas production capacities on the other hand to meet demand, and this due to insufficient investment.
World energy forum
Investment in oil and gas has declined in 2020 and 2021 due to the pandemic, which is a “recipe for more volatility,” said World Energy Forum Secretary-General Joseph McMonigle at a session at the World Oil Conference.
The capital reductions of international oil companies and national oil companies in 2020 amounted to about 35 percent. In 2021, there was another 23 percent drop in capital spending levels from pre-pandemic levels.
For example, exploration and extraction companies spent $525 billion in 2019, an amount that decreased to $341 billion in 2021.
“We have to go back to the level of $525 billion over several years until 2030 to restore the market balance.. I am afraid that what we see of the energy crisis is at our doorsteps,” warns McMonigle in his speech at the end of last year, before the sharp rise in oil prices and the outbreak of The Russian-Ukrainian war that reinforced these price levels, which had begun rising in 2021.
According to the Higher Energy Forum, while the initial cuts in capital expenditures in the oil sector were driven by the collapse in demand caused by pandemic shutdowns, this trend has continued due to supply chain issues and labor shortages. In recent months, the conflict between Russia and Ukraine, global inflation and policy uncertainty have exacerbated the crisis.
McMonigle points out that firms in the final investment decision stage must take inflation into account and even reconsider previous final investment decisions.
The refining, processing and marketing sector was the most affected by the impact of the lack of investment with confusion in policies and decarbonization, which contributes to the increasing deficit in refining capacity.
There is no substitute for hydrocarbons
Although oil companies have reported record profits in the past two quarters, policy
uncertainty combined with investor pressure to maintain capital discipline and ESG requirements have deterred them from increasing capital expenditures.
“There is no substitute for hydrocarbons (i.e. oil and gas) in the energy transition,” says the Forum. “While demand fell at a record rate of 8-10 million barrels per day during Covid, the world was still using 90 million barrels per day when we were in a global economic shutdown, which shows how pervasive hydrocarbons are in the global economy.”
The official at the World Energy Forum warns that “repressing investment and supply before demand will only lead to higher prices and volatility,” and that prices may rise from current levels in the second half of 2022.
The head of the International Energy Agency, Fatih Birol, said in an interview with the “Financial Times” a few months ago that the oil and gas sector needs hundreds of billions of dollars in investments in order to be able to meet the increase in global demand. He pointed out that investing in renewable or clean energy (sun, wind, etc.) should not be at the expense of investing in oil and gas.
Investing in energy supply the biggest challenge
Hess, a leading independent global energy company headquartered in the United States, sees investing in energy supplies as “the biggest challenge the oil and gas industry faces today.”
Although research and development is rising in alternative energies and technologies aimed at diversifying and, at some point, eliminating fossil fuels largely, oil and gas will remain at the heart of energy use for the next few decades, according to Hess.
Ultimately, investors must realize that to have an orderly energy transition, oil and gas are part of the solution, not the problem.
