Government actions aimed at addressing climate change are causing oil companies to hesitate in making significant investments in new production, despite their current record-breaking profits. This could result in limited supply and elevated prices as renewable energy options attempt to fill the gap.
The cost of crude oil has risen to over $90 per barrel and experts believe it will reach over $100 by the end of the year. However, rather than investing heavily to increase production, companies are choosing to increase dividends or repurchase stocks as a way to reward shareholders.
According to environmental organizations, reducing the growth of production may hasten the transition to renewable energy and reduce carbon emissions. However, executives at the World Petroleum Congress in Calgary cautioned that a decrease in drilling investments may worsen energy shortages in impoverished nations and contribute to inflation.
According to Exxon Mobil CEO Darren Woods, failing to invest in the industry will result in a shortage of supply and ultimately lead to increased prices. Woods also stated that oil and gas reserves are decreasing at a rate of 5-7% each year and if companies cease investing in replacement efforts, production levels will decline.
“The current deficiencies in the transition are creating widespread confusion among industries that generate and/or depend on energy,” stated Amin Nasser, CEO of Aramco. “Individuals and companies with long-term plans and investments are uncertain of how to proceed.”
According to Rystad Energy, global investment in upstream activities is projected to reach $579 billion by 2023, which is a slight rise compared to the yearly average of $521 billion from 2015 to 2022. This timeframe includes the 2014-15 drop in oil prices and the COVID-19 crisis.
Investment in the oil and gas industry reached its highest point in 2014 at $887 billion.
According to Aditya Ravi, senior vice-president of upstream research at Rystad, investment is expected to remain relatively steady in the next two to three years, but may decrease in 2026 due to the increasing use of electric vehicles and government regulations on emissions, which will lead to a leveling off of oil demand.
The International Energy Agency issued a warning last week that the demand for oil will reach its highest point by 2030.
Alex Pourbaix, executive chair of Cenovus Energy, stated that uncertainties surrounding government policy are a major obstacle in investment.
According to Pourbaix in an interview, investing in large projects to increase production by 100,000 barrels per day would require significant spending of billions of dollars. However, due to uncertainties in government policies, any substantial investment will likely have to be delayed.
The government of Canada has yet to determine the subsidies for initiatives aimed at capturing and storing emissions, and is working on implementing a limit on oil and gas emissions.
The largest purchasers, such as the United States and the European Union, have also implemented ambitious strategies to speed up the shift from non-renewable energy sources to cleaner sources of energy as they aim to fulfill their commitments to reducing emissions as outlined in the Paris Agreement, an international agreement aimed at combatting climate change.
could be at risk of losing their investments.
According to a recent report by Deloitte, investors who own $2.3 trillion in equity within the worldwide oil and gas sector may face potential losses.
are changing expectations about growth markets for energy faster than company executives.
Approximately 43% of investors who were surveyed highlighted battery storage as their main focus for investing.
Chris Severson-Baker, the head of the Pembina Institute climate think-tank, expressed optimism that oil companies were reducing their investments in expansion, which should lead to a decrease in emissions. However, the shift towards more environmentally-friendly energy sources is not happening quickly enough.
In the coming years, there will be a shift towards renewable energy, electric vehicles, and heat pumps that will gradually decrease demand, according to the speaker.
According to Omar Farouk Ibrahim, the Secretary General of the African Petroleum Producers’ Organization, policies that discourage investment have the greatest negative impact on impoverished nations.
He stated that we are being pressured to avoid investing in fossil fuels.
By 2030, the United Nations predicts that approximately 2 billion individuals will continue to use hazardous and contaminating fuels for cooking, a decrease from the current 2.3 billion.
Some oil companies are not cutting back on production expenses. Oil India Ltd, a government-owned company, intends to increase its exploration budget in India, a nation that heavily relies on imported oil, from $1 billion this year to $10 billion over the course of five years.
According to managing director Ranjit Rath, investing is necessary and we have no choice. If we don’t invest at the current price, we will miss out.
According to Rath, increasing oil production could generate the funds necessary to pursue net-zero goals.
Petrobras, a government-owned oil company in Brazil, plans to raise its operating production share by 18% to reach 3.2 million barrels of oil equivalent per day (boepd) by 2032, compared to the current 2.7 million boepd. However, the company is facing delays due to difficulties in obtaining necessary equipment for constructing floating production storage and offloading vessels, according to Carlos Travassos, Petrobras’ chief officer for engineering, technology, and innovation.
Yrjo Koskinen, a professor of sustainable and transition finance at the University of Calgary, believes that the prioritization of shareholder returns indicates that oil companies are focused on short-term gains rather than long-term development.
The statement from Reuters suggests that although some believe oil and gas will remain in use for many years, their actions do not necessarily align with this belief.