IEF Warns Oil and Gas Investment Cuts Will Spur Higher Prices, Volatility
The International Energy Forum (IEF) today released a new joint report with Boston Consulting Group (BCG) that warns weak energy demand caused by the COVID-19 pandemic and subsequent investment cuts by companies will have repercussions through a future supply shock.
“Although upstream investment has peaked for now, ongoing demand for oil and gas will necessitate an increase soon.
“Without sufficient investment, a reduced supply of oil and gas could lead to higher prices and greater market volatility, slowing the global economic recovery and jeopardizing energy security, and international goals,” the report concludes.
The report “Oil and Gas Investment in the New Risk Environment” was presented in an online event Thursday by IEF Secretary General Joseph McMonigle and BCG Global Energy Practice Leader Alan Thomson.
The webinar was live streamed to the public.
The report states that capital expenditures by oil and gas companies has fallen by 34 percent this year and early assessments indicate further reductions of 20 to 30 percent in 2021.
IEF Secretary General Joseph McMonigle said the global community must continue the race to the energy transition but also needs to be cognizant of this potential new fallout caused by the pandemic.
“Given that producing natural oil and gas wells decline over time, slashing investment in new production locks in lower total supply,” McMonigle said. “While that may not pose an immediate threat to oil and gas markets, it won’t be long before this lower supply collides with resurgent demand.
“The result will be higher and more volatile oil prices and headwinds for the post-pandemic global economic recovery.”
According to the report, the IEF and BCG analysis “suggests that industry investment will have to rise over the next three years by 25 percent yearly from 2020 levels to stave off a crisis” and “substantially greater sums will be needed by the end of the decade to ensure sufficient production to guarantee market stability.”
The Report states that COVID-19 has had multiple impacts on oil and gas markets.
Read Also: Nigeria’s Big Banks Withstand 40% Oil Exposure Stress Test
“It has reduced prices and government revenues, significantly lowered demand, and inflated stockpiles of crude and petroleum products.
“The weaker environment has also led oil and gas companies to cut capital expenditures (capex) in a bid to shore up their balance sheets.
“The impact of this reduced investment and activity is beginning to be visible in natural gas supplies—a critical fuel for offsetting demand for coal, which has a more carbon-intensive emissions profile”, the report reveals.
Unfortunately, it states that these lower capex levels appear to be insufficient to deliver the volumes of oil and gas needed to maintain market stability.
IEF thinks greater investment will be necessary to avoid a future of higher prices and increased market volatility.
“Inadequate investment would set off another wave of unwanted boom-and-bust pricing”, it explains.
Governments and industry leaders set up the IEF producer-consumer dialogue—whose fundamental aim is to enhance energy market stability, sustainability, and transparency—to avoid this outcome and to support the health of the global economy.
The threat of underinvestment looms as governments and consumers feel the pinch of reduced income because of the unprecedented recession.
The rising price volatility that this is likely to cause weakens prospects for the inclusive and sustainable economic recovery that producers, consumers, and governments all want.
Oil and gas companies have cut their capex by a combined 34% in 2020, slightly more than the initial 28% reduction following the price decline that started in 2014.
Already, companies are indicating that additional capex cuts are likely in 2021, which underscores the uncertainty they face.
“For our modeling, we assumed a further 20% decline, which is in the range of announcements made at the time of publication”, IEF says.
Moreover, the firm estimates that every dollar of capex that is cut today will have twice as powerful an effect in terms of reducing activity than cuts made following the 2014 fall in prices had.
Starting in 2014, oil and gas companies cut capex for two consecutive years.
At the same time, service sector companies reduced their costs sharply, which helped to support industry activity.
This time around, suppliers have less scope to do that.
Read Also: Uncertainty Shadows Nigerian Economic Recovery as Oil Price Drops
As a result, the recovery in investments is likely to take longer than it did in the wake of the 2014 price drop.
