As oil and gas prices spike, global investment lags behind demand

  • Outside of the Middle East and a few spots elsewhere around the world, the hundreds of billions of dollars that would be needed to grow supply this decade isn’t showing up.

Fears of a global oil and gas shortage are pushing up prices, leading to a painful spike that is hitting many companies and consumers in their pocketbooks.

The high prices have prompted multiple pleas for the industry to invest in new production.

But outside of the Middle East and a few spots elsewhere around the world, including Russia, the hundreds of billions of dollars that would be needed to grow supply this decade isn’t showing up in new leases, drilling rigs, production facilities and pipelines.

“The industry will need to spend significantly more, especially if oil and gas demand keeps climbing beyond pre-pandemic levels through 2025,” Moody’s Investors Service analysts wrote in a report released Oct. 7.

Though oil and gas companies are expected to spend $352 billion on drilling and other activities worldwide this year, Moody’s said, the report recommended $542 billion in spending — the highest since 2015.

“Our analysis demonstrates that upstream companies will need to increase their spending considerably for the medium term to fully replace reserves and avoid declines in future production,” Sajjad Alam, a vice president and senior analyst at Moody’s, said in the report.

While U.S. natural gas prices have more than doubled this year, liquefied natural gas prices in Asia and Europe have hit record highs, and crude oil has climbed by more than 50% in price, drilling outlays are forecast to increase only 8% globally, Moody’s said.

“The upstream energy sector continues to invest well below pre-pandemic levels despite the sharp turnaround in oil and natural gas prices in 2021. Exploration and production companies are signaling continued spending restraint in 2022,” the report cautioned.

Boosting profits and dividends to please investors and worries about the long-term future for oil and gas are holding back companies from pouring more money into exploration and production.

But the lack of drilling sets up the market for even tighter supply scenarios, Alam wrote in the report.

The top official of the Organization of the Petroleum Exporting Countries said: “Don’t blame us.”

Speaking at the online Energy Intelligence Forum on Oct. 6, OPEC Secretary General Mohammad Barkindo said: “The energy transition is not being handled properly. … And hence we are beginning to see the fallout.”

The problem lies with the “hysteria” that has overtaken global thinking about how and how quickly to move away from fossil fuels to cleaner energy, he said. That rush and unrealistic planning is shrinking much-needed investment in new production, he said.

In an interview with The Wall Street Journal a few days before his remarks at the energy forum, Barkindo said consumers should brace for more energy shortages unless the world boosts investment in oil and gas development.

“The energy crisis in Europe and many parts of the world is a wake-up call,” he said. “It all comes back to the issue of investment across the oil and gas industry.”

Saudi Aramco plans to invest in an additional 1 million barrels a day of new production by 2027, adding more than 8% to its current maximum output, CEO Amin Nasser said at the same online energy forum.

“We still expect growth in oil demand,” he said, contrary to predictions of peak global oil demand as soon as 2030 or early next decade.

The Saudis see cleaner oil and gas in the future rather than a lot less of the fuels, differing from the view that renewables and greener fuels soon will take over the market.

Abu Dhabi National Oil, the main oil producer in the United Arab Emirates, plans to spend tens of billions of dollars this decade to boost its oil production capacity to five million barrels a day, up from about four million today.

Neighboring Qatar, which leads the world in LNG production just as Saudi Arabia is a leader in oil, has a similar view of what the energy transition means to demand for fossil fuels.

“For me to just come out and say net-zero 2050 would be very sexy,” Saad Al-Kaabi, Qatar’s energy minister, said at an event in Doha on Oct. 11. “But it’s not the right thing.” Many politicians “are just throwing it out there without a plan,” he said.

Banking on strong demand for LNG in the decades ahead, Qatar is going ahead with a $30 billion project to boost its LNG production capacity by 50% in the next six years.

Don’t blame high prices on the transition to clean energy, said the chief of the Paris-based International Energy Agency. “Well managed clean energy transitions are a solution to the issues that we are seeing in gas and electricity markets today, not the cause of them,” Fatih Birol said at a meeting of the European Parliament’s energy and environment committees last month.

Multiple factors, including inadequate natural gas stockpiles in Europe, supply disruptions and a faster-than-expected economic recovery from the pandemic created the supply-and-demand imbalance, driving up prices, Birol told the committees.

“A lot less product is available to meet this now-rapid growth we’re seeing,” ExxonMobil CEO Darren Woods said in virtual remarks at a conference in Russia on Oct. 13. “If we don’t balance the demand equation and only address the supply, it will lead to additional volatility.”

Regardless of the reasons, the high prices for oil and gas are driving utilities in Europe, China, India, Pakistan and elsewhere around the world to turn to the old reliable power-generating fuel — coal — and driving up greenhouse gas emissions.

“This is the revenge of the fossil fuels,” Thierry Bros, an energy expert and professor at the Paris Institute of Political Studies, told Bloomberg last week.

“Energy importers have two options,” Clyde Russell, a longtime energy reporter and columnist with Reuters, wrote Oct. 5. “Namely to increase investments in fossil fuels in order to ensure that they always have sufficient supplies, or go down a path of boosting investment in renewables and energy storage in order to reduce reliance on foreign fuels.”

Larry Persily is a former Alaska journalist and state and federal official who has long tracked oil and gas markets and projects worldwide. He can be reached at [email protected].

Updated: 
10/20/2021 - 10:02pm