Oil Industry’s Transition Will Be Bumpy for All of Us (Part 1)

January 13, 2022

10 years of Oil prices. Note crashes in 2014 and 2020

So, oil companies responded to the crash in prices of 2014, and more so to the Covid crash, by cutting production. They instead sought to make good on long-neglected promises to investors by raising dividends and doing stock buybacks to raise value. Yet now, they are caught in a vice between their desire to continue business as usual, the demand of major investors to move away from fossil fuels, and the onrushing adoption of EVs, which will proceed faster than most people think.

Financial Times (paywall):

US oil production is on course to break pre-pandemic records next year, a government agency has forecast, complicating the Biden administration’s ambitions to shift the country away from fossil fuels. Output is likely to rise to a fresh annual high of 12.4m barrels a day in 2023, the Energy Information Administration said on Tuesday, eclipsing the previous record volume of 12.3m b/d set in 2019.

US natural gas production will also set new records over the next two years, the independent statistics agency said. It marks a stark reversal for an oil and gas industry that was sent into freefall by the pandemic-driven economic downturn, and defies widespread predictions that the country’s oil industry would not recapture peak production levels.

The forecast comes as higher energy prices spark new investment in developing oil and gasfields. The EIA expected Brent crude oil prices to average $75 a barrel this year and $68 a barrel next year — lower than spot prices, which suggests production could climb even in a weaker commodity market. While the Biden administration has promised a long-term shift away from fossil fuels, it has recently leaned on the domestic oil sector to lift output to help cool a rally in motor fuel, where prices last year reached their highest levels since 2014.

The expected supply rebound comes even as many of the largest US oil and gas producers have shifted their focus over the past two years away from maximising output growth and towards rewarding shareholders.

Many of the nation’s top producers, including ConocoPhillips, EOG Resources and Pioneer Natural Resources, are setting up new dividend schemes and using cash to buy back their own shares, rather than drill more new wells.

Analysts say the next wave of production growth will instead be led by smaller producers, often family-owned or backed by private equity, which are not under the same shareholder pressure to trim growth.

The EIA also predicts carbon emissions from the energy sector will continue to rise through 2023 after strongly rebounding in 2021 from a sharp fall during 2020.

Houston Chronicle:

The amount of oil and natural gas discovered globally last year fell to the lowest level in 75 years after oil companies slashed their exploration budgets during the pandemic-driven downturn. 

Oil companies discovered 4.9 billion barrels of oil and natural gas in 2021, the lowest level since 1946, according to a report from Rystad. The Norwegian energy research firm said that’s a “considerable drop” from the 12.5 billion barrels discovered in 2020. 

“A reduction in cumulative volume highlights the absence of large individual finds,” Rystad said in its report. 

The lack of new oil discoveries is a concern for the oil industry, which must constantly replace depleting oil and gas reserves to maintain production levels and revenues. Industry analysts closely follow companies’ capital budgets to determine the direction of future oil production. 

Oil companies discovered an average of 408 million barrels of crude and natural gas per month in 2021, down from an average of 1.7 billion barrels per month in 2015, according to Rystad. Some major discoveries last year include Exxon Mobil’s discoveries in offshore Guyana and Russian Lukoil’s discovery in November off the coast of Mexico.  

Oil companies are making smaller discoveries, not necessarily because the world is running out of fossil fuels. Rather, companies are underinvesting in exploratory drilling and new projects after recent oil busts. 

After crude demand and prices plunged at the start of the global pandemic, oil companies slashed spending on new projects by more than 27 percent to $334.7 billion in 2020, down from $461.7 billion in 2019. Although capital spending rose slightly in 2021, they remained about a quarter lower than pre-pandemic levels, according to an analysis by Canadian bank RBC Capital Markets. 

Enverus, an Austin-based energy research firm, expects that drillers will raise capital spending by about 20 percent in 2022.

Exxon Mobil, the nation’s largest oil company, in December said it plans to to spend between $20 billion and $25 billion on new oil projects next year, up from around $16 billion this year but still less than pre-pandemic level of $33 billion. Rival Chevron said it plans to spend $15 billion on new projects next year, an increase of more than 20 percent from 2021 levels but still lower than pre-pandemic levels of $19 billion to $22 billion.

However, the small capital spending and lack of major oil discoveries might not matter as the world shifts away from fossil fuels. The International Energy Agency warned last year that the world will need to stop drilling new oil and gas wells immediately to meet its net-zero target by 2050. Some analysts predict global oil demand could peak this decade with the rise of electric vehicles and renewable energy. 

European oil majors, in particular, are aggressively shifting investment away from oil and gas projects toward solar, wind and electric vehicle charging stations. BP has pledged to no longer explore new basins or enter a new country to find the next giant oilfield, and Royal Dutch Shell last year said its crude production peaked in 2019.  


3 Responses to “Oil Industry’s Transition Will Be Bumpy for All of Us (Part 1)”

  1. In 2020 there was also a quick recovery. So there was nothing basicaly wrong with the oil industries just things not predictable and that were the reactions of government to the pandemy wich came close to panic. Oil will be with us for a long time. There is not yet a real alternative to it. It will take decades for oil to become obsoleet the same way as stone tools became absolete to iron tools. A lot of stone left but no use for it anymore.

  2. rhymeswithgoalie Says:

    Peter, your capture of Bloomberg’s description of the nonlinear nature of oil markets is still my go-to explanation to people why even a modest amount of EV purchases can make a difference.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: