The last barrel

Unrealistic clean energy goals, forced on producers by power-hungry government officials and environmental groups, caused an unprecedented reduction in oil and gas investment at the start of the Covid pandemic. The pressure tactics compelled energy producers to commit to emission-reduction targets and increased investment in cleaner energy, even as they were struggling with massive losses caused by plunging demand. In 2021, global oil and gas discoveries hit their lowest level in 75 years. Total global discovered volumes in 2021 were calculated at 4.7 Bboe, the lowest tally since 1946.

Elevated commodity prices. This trend was somewhat reversed in 2022, when higher oil and gas prices enabled producers to stage a remarkable recovery. Record cash flows restored confidence and repaired balance sheets. According to the U.S. Energy Information Administration, in 2021, U.S. energy demand rebounded from its 2020 lows caused by the Covid-19 pandemic. The average prices of crude oil and natural gas in the U.S. rose to their highest levels since 2014. Proved reserves of natural gas reported by operators established a new record in the U.S. in 2021, while proved U.S. oil reserves increased but did not quite return to pre-pandemic levels.

This revitalization was accomplished without assistance from governmental authorities, who were forced to acknowledge renewables are not a near-term solution. During his State of the Union address on Feb. 8, President Biden admitted “we’re going to need oil for at least another decade.” Congressional members erupted in laughter at Biden’s incompetence and total lack of knowledge about global energy requirements. Mr. Biden quickly “recovered,” saying, “and beyond that, we’re going to need it.”

Aramco hoists red flag. Saudi Aramco’s CEO Amin Nasser warned that the increased focus on climate was undermining investment in oil and gas to the point where it now posed a threat to the world’s energy security. Global investments in the clean energy transition totaled $1.1 trillion in 2022, equaling for the first time the amount invested in fossil fuel production (Bloomberg). The amount represents a 31% increase from 2021, but it is just a fraction of what’s needed to reduce GHS emissions enough to satisfy the global warming alarmists, who continue to fly on private jets and buy luxury beachfront estates (Al Gore and John Kerry being the “rules for thee not for me” hypocrites).

The shift is raising alarm among top tier oil executives, who have stated that more should be invested in fossil fuels because of future energy requirements. Mr. Nasser said mounting pressure to curb new investment in oil and gas was based on “flawed assumptions.” Proponents of the popular energy transition narrative paint a picture of a Utopian world, where alternatives are ready to replace oil and gas almost overnight, he told the Saudi Capital Market Forum in Riyadh.

“If ESG-driven policies are implemented with an automatic bias against any and all conventional energy projects, the resulting underinvestment will have serious implications for the global economy, for energy affordability, and for energy security.” Mr. Nasser said the focus on ESG criteria in investment was raising the cost of capital for oil and gas projects—now perceived to carry higher risk. Nasser’s comments are similar to recent comments by Haitham Al-Ghais, OPEC secretary-general, who said the oil and gas sector was plagued by “years of chronic underinvestment” and needs $500 billion annually to 2045. That’s at odds with what most climate activists and some major energy bodies say is necessary to slow the warming of the planet.

Demand for oil high and still growing. OPEC’s February Monthly Oil Market Report states that world oil demand growth in January and February was 2.5 MMbopd. However, oil demand was adjusted slightly lower in the second half of 2022 to incorporate revisions to OECD data. But oil demand in non-OECD countries was revised higher, due to improvements in economic activity in some countries and a strong recovery in oil demand in China after the zero-Covid policy was lifted. Incorporating these updates, OPEC says total world oil demand averaged 99.6 MMbopd in 2022.

In 2023, OPEC forecasts that world oil demand growth will be 2.3 MMbopd. Oil demand in OECD countries is projected to grow 0.4 MMbopd, while the non-OECD region will grow by approximately 2 MMbopd. Minor upward adjustments were made to OECD Asia Pacific in 1Q23 and 2Q23, to reflect the expected positive spillover from the opening of the Chinese economy on the region’s petrochemical sector. In the non-OECD countries, minor upward revisions were applied to consider an acceleration of oil demand growth in China, on the back of a stronger perceived performance of the country’s economy following the lifting of Covid restrictions. Accordingly, world oil demand in the first quarter of 2023 is forecast to rise 1.9 MMbopd and to grow even more in the following months. For 2023, oil demand is projected to average 101.9 MMbopd.

International Energy Agency. The IEA has called for termination of new investment in fossil fuels to neutralize carbon emissions by 2050. ESG aside, investments in oil and gas tend to be cyclical; they fall when prices fall and have been subdued since the 2014 oil price crash. Russia’s invasion of Ukraine prompted a spike in prices last year as nations scrambled for new sources of supply. However, IEA says that oil and gas executives are now competing for capital with renewables which, regardless of the climate benefits, are now competitive compared to hydrocarbon-based energy in the U.S. and are forecast to grow over the next several years.

Oil and gas here to stay. Despite the IEA’s net-zero “solution,” the world’s largest producers continue to reject this call for a rapid shift away from oil and gas, warning that starving the industry of investment will harm the global economy. Energy ministers in Qatar and Saudi Arabia say they will keep expanding their oil and gas facilities and warned others against the consequences of starving the industry of cash. The euphoria around the transition to clean energy is dangerous, said Qatar’s Saad Sherida Al Kaabi. “When you deprive the business from additional investments, you will have large spikes in prices.” Authorities in Saudi Arabia said the kingdom is increasing its oil production capacity, while Qatar is working on a $29 billion expansion of its LNG facilities.

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com