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IEF: Oil & gas investment crisis threatens energy security

9 December 2021

Oil and gas upstream investment needs to increase and be sustained at near pre-Covid levels of $525 billion through 2030 to ensure market balance despite slowing demand growth, according to a new report by the Saudi Arabia-based International Energy Forum (IEF) and IHS Markit.

Upstream investment in the oil and gas sector in 2021 was depressed for a second consecutive year at $341 billion—nearly 25% below 2019 levels. Meanwhile, oil and gas demand is now near pre-pandemic highs and will continue to rise for the next several years, particularly in developing countries.

The investment environment for the oil and gas sector is becoming more challenging in the face of unprecedented uncertainty and risks, including record price volatility, evolving government regulations, increasingly diverging long-term demand narratives, and non-standardized ESG criteria, according to the report.

The next two years (2022-2023) are critical for sanctioning and allocating capital toward new projects to ensure adequate oil and gas supply comes online within the next 5-6 years. Operators will continue to favor projects with access to existing infrastructure as these require less capital, have shorter payback periods, and are more insulated from long-term demand risks. Fear of a mismatch between demand and future supply could start to materialize in this time frame.

The role of US unconventional production from shale formations in the global supply mix is evolving, bringing conventional investment trends back to the fore, the report said. The swift growth in US production both masked the impact of pre-2020 lower investment in conventional production and amplified it post-2020.

Insufficient upstream investment would result in more price volatility and spur adverse economic consequences. Increased price volatility would weaken the prospects for the inclusive and sustainable economic recovery that producers, consumers, and governments all want. It would also complicate policy choices during the energy transition.

Concerns about inadequate upstream oil and gas investment had also been repeatedly voiced by the Paris-based International Energy Agency (IEA) until around 2019. More recently, the IEA unexpectedly reversed their position, and issued a call to stop investment in fossil fuels, and increase investment in renewable energy.

Fossil fuels provide more than 80% of the world’s primary energy, while ‘modern renewables’—wind and solar electricity—provide less than 5% of global primary energy. An oil and gas supply crunch can be reasonably expected to trigger a severe recession of the global economy.

Source: IEF