PPOWER CUTS in China. Coal shortage in India. Rising electricity prices in Europe. A rush for gasoline in Britain. Power outages and fuel fires in Lebanon. Symptoms of dysfunctional global energy markets are everywhere.
In recent days, chaos has pushed oil prices in America above $ 80 a barrel, their highest level since late 2014. Natural gas prices in Europe have tripled this year. The demand for coal, supposedly on the heap of history, has jumped. The general manager of a commodities trading company says he comes to the office at 5 a.m. to get the latest news on blackouts in one Asian country or another. And winter, with its need for heating, has not yet arrived in the northern hemisphere.
A few years ago, fossil fuel producers would have responded to these price signals by rapidly increasing their production and investment. In 2014, with crude above $ 100 a barrel, Royal Dutch Shell, a European supermajor, invested more than $ 30 billion in capital spending in upstream oil and gas projects. He then spent $ 53 billion BG Group, British rival, to become the world’s leading producer of liquefied natural gas (LNG).
Not this time. Climate change has led to unprecedented pressure on oil and gas companies, especially in Europe, to abandon fossil fuels. As part of Shell’s long-term transition to low-carbon gas and power markets, its upstream capital spending this year has declined to around $ 8 billion. Last month, it sold its once prized shale assets in Texas’s Permian Basin to U.S. rival ConocoPhillips for $ 9.5 billion. It is withdrawing from its onshore operations in Nigeria, a country it first set foot in in 1936. He recently said he would cut oil production by 1-2% each year until 2030. Asked On what soaring energy prices mean for investment, Wael Sawan, his head of upstream oil and gas production, is blunt. “From my point of view, that doesn’t mean anything,” he says.
This view is pervasive in much of the petroleum industry. In Europe, listed oil companies are under pressure from investors, mainly for environmental reasons, to stop drilling new wells. More upstream investment as prices rise could ‘delegitimize’ their public commitments to cleaner energy, says Philip Whittaker of BCG, a consulting firm. In America, publicly traded shale companies, which were too eager to ‘smash’ whenever oil prices soared, are now under the thumb of shareholders who want profits paid back through dividends and buybacks. rather than pouring into a hole in the ground.
State-owned oil companies are also under budget constraints, in part because of the covid-19 pandemic. Only a few, like Saudi Aramco and Abu Dhabi National Oil Company (ADNOC) increase production. The result is a global drop in investment in oil and gas exploration and production, from over $ 800 billion in 2014 to around $ 400 billion, where it is expected to hold (see chart).
Keep it in the ground
Meanwhile, demand has returned with surprising vigor as the pandemic abates. For the first time, the oil market could quickly reach a point of running out of spare capacity, according to Goehring & Rozencwajg, a commodities investment firm. It is perhaps only a temporary state of affairs; Aramco and ADNOC could react quickly. But temporarily, at least, that would push crude prices up sharply, adding further constraints to economies that are already suffering from soaring natural gas costs for homes and energy-intensive businesses, steelmaking and production. glassblowing fertilizer for wine bottles.
From an environmental perspective, higher prices may be welcome if they undermine demand for fossil fuels, especially in the absence of a global carbon tax with teeth. In its “World Energy Outlook”, published on October 13, the International Energy Agency (OUCH), an energy forecaster, said the rebound in fossil fuel consumption this year could lead to the second-largest absolute increase in carbon dioxide emissions on record. To achieve a “net zero” emissions target by 2050, the OUCH says there is no need to invest in new oil and gas projects after 2021. Instead, he calls for a tripling of clean energy investments by 2030.
The OUCHPart of the argument that no new natural gas project, less filthy than with other hydrocarbons, is necessary is based on investments in low-emission fuels, such as hydrogen. But, he admits, these are “well off track”. This shows the risk of treating all fossil fuels, each of which bears the responsibility for carbon emissions, as equal culprits. Reducing the supply of unreserved natural gas could be counterproductive.
On the one hand, gas is currently the main substitute for thermal coal in countries like China and India that want to reduce their emissions from electricity. Bernstein, an investment firm, predicts that Chinese imports of LNG could almost double by 2030, making it the world’s largest buyer. In the absence of investment in new projects, Bernstein expects LNG ability to be below 14% of what is needed by then. This would hinder Asia’s exit from coal.
Additionally, natural gas performs a vital function in maintaining the stability of the electricity grid, especially in places that depend on intermittent wind and solar power (at least until global grids become more interconnected). In these markets, the marginal cost of natural gas often sets electricity prices, even though most of the electricity comes from renewables with zero marginal cost. The higher the price of gas, the higher the electricity bills. This could dampen popular support for clean energy.
The question of whether a new offering will be forthcoming remains unanswered. As the boss of another commodities trader observes, “because natural gas has been put in the dirty fuel column, nobody is investing.” For the supermajors in the private sector, the problem is that they are all split more or less evenly between the production of oil and natural gas. Because the two often spring from the ground together, the two fuels tend to be closely related in the minds of investors. It’s frustrating. “It’s an incredibly short-sighted view that we are bundling oil with gas,” a senior executive ranted. Yet his company does not seem likely to challenge investors by significantly increasing gas production.
An executive at another major oil company said higher prices could increase pressure to invest a little more, but not to deviate from long-term climate commitments. Instead, he says the new investment will likely come from two sources that are not exposed to public pressure: state-owned oil companies and private companies. The executive notes that most of the recent increase in the number of drilling rigs in the Permian Basin has come from unlisted frackers, rather than publicly traded companies. Some compare it to contraband during the Prohibition era. The higher the price of oil and gas, the more incentives there will be to produce them. On condition, that is, that it takes place out of public view. ■
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This article appeared in the Business section of the print edition under the headline “Playing for time”