Executive viewpoint
Meeting society’s future energy requirements calls for a pragmatic approach on many fronts. However, complex discussions regarding transitions to a lower-carbon world find realism too often in short supply.
Pursuing cleaner, affordable and reliable energy should be policymakers’ primary focus. However, much of their attention is directed toward establishing net-zero targets, coupled with an increasing reliance on renewable power, with a detached determination to move away from oil and gas. The associated economic realities of these priorities deserve a great deal more balanced consideration.
There is minimal recognition of investors’ need toward maintaining effective returns on invested capital to enable, perhaps the ability to recycle free cash flow into lower carbon alternatives, or the pace at which decarbonisation of energy streams can be achieved.
Underinvestment over the past decade only reduces access to a reliable mix of energy sources in the future, versus the simple fact that oil and gas will continue to be relied upon for many decades ahead.
Supply/demand fundamentals. The speed of demand recovery from the pandemic has been swifter than most anticipated, challenging the view that it would curb consumption for the longer term. With supply fundamentals currently challenged to keep pace with demand, energy shortages are emerging, and commodity prices are spiralling upwards to new highs, compared to historic lows of the previous year.
Pre-Covid, the world was consuming 100 MMbopd, and our industry needed to replace 7 MMbopd of new production annually to offset natural decline. Oil demand has recovered to around 98 MMbopd and should reach pre-pandemic levels during 2022.
Many analysts mapped out the convergence of supply and demand on the oil side, but they were evidently caught off-guard, as relates to global natural gas markets. A colder-than-normal 2020/2021 winter, extending into spring, impacted critical storage volumes, but the level of demand growth across many sectors was apparently missed within most models and forecasts.
Now, we head back toward winter, with many areas projected to start below five-year lower ranges for storage. This is driving natural gas prices to record levels, and it doesn’t bode well for most consumers. Competitiveness will be seriously impaired, with energy a significant part of many industries’ cost structures.
I expect that most agree the underinvestment trend must be reversed, as adequate supply is vital for energy production and for advanced petrochemicals and other products upon which modern life depends. While OECD nations’ leaders point to green commitments, the necessity of maintaining oil and gas investment seems less well-understood.
Evidently, the general population is unaware of the challenge to deliver reliable, affordable energy for however long the transition takes.
Certainly, renewable energy forms will play a role going forward, but becoming overly dependent on intermittent energy sources is neither intelligent nor workable, as has been evident of late. And for investors, returns on renewable projects—at least in the short term—are not sufficient to finance capital requirements of larger low-carbon developments.
Traditional production can possibly work in tandem with renewable ambitions, assuming natural gas can cover renewables’ intermittency during peak energy conditions, as well as provide base load requirements. Investing to maintain existing oil and gas infrastructure is also crucial, as it can possibly be repurposed for future “new energy” developments within certain technical constraints.
Supporting developing economies. Second, meeting society’s energy requirements includes supporting developing nations’ abilities to provide their populaces with affordable, reliable energy and, where possible, utilising indigenous resources. Most will agree that this is particularly important for Africa, where the most prevalent sources of utilised energy are frequently of less-desirable means. This priority will be challenging, given certain financial institutions already signalling they will avoid financing oil-and-gas-related investments.
Barriers to effective exploration will also see developing economies struggle to benefit from their resources, inhibiting future opportunities to invest in education, infrastructure and health care services. They deserve the opportunity to improve living standards and bring forth socioeconomic benefits that enable them to concentrate more on improving environmental standards and less on day-to-day subsistence.
The value our sector delivers. Third, in the face of an emotive anti-oil-and-gas lobby, we should all remain positive advocates of the immeasurable economic prosperity that our industry delivers.
A world without the products that our industry provides would be incredibly poorer, more hostile and less healthy. Imagine a modern hospital without high-performance plastics or an uninterruptible power supply, plus countless other components. Our industry also provides rewarding, high-tech, tax-paying jobs across every conceivable discipline. We are significant wealth creators and major investors in people wherever we work.
There shouldn’t be a choice between being long-term supporters of a cleaner energy mix or meeting current oil and gas demands; however, we do need to be realistic about how we can provide both responsible and economical energy supplies that benefit society.
