By: Nawaf Almutairi
As the race to preserve and efficiently utilize national resources continues, experts rely on various approaches to maintain equilibrium within the oil and gas industry. Investments are a common source of both funding and navigating solutions, which is why understanding differing views is critical for informed decision-making. The two articles discussed present perspectives from Wood Mackenzie, the International Energy Forum (IEF), and S&P Global before assessing a balanced approach for a stable energy market.
Wood Mackenzie’s Perspective: Managing Peak Demand with Steady Investment
Oil and gas investing took a massive hit during the COVID-19 pandemic, with economic recovery only 1/3rd as of 2023. This is still less than 50% of 2014 peak spending. Despite these figures, Wood Mackenzie offers a cautious yet hopeful outlook as the steady decline of oil and gas won’t happen for another decade. Global oil demand will reach a peak of 108 million barrels per day (b/d) and in the meantime, the investment side will target low-cost and low-risk methods of meeting the demand. Even with a steady decline, oil consumption is projected to hover above 90 million b/d until 2050.
Since oil and gas are depleting natural resources, they must be continuously sourced. Without investments, supply tanks and producing fields will be depleted. Given these facts, the public sentiment around the capital decline in upstream investment is unfavorable. Why would you spend less to maintain a necessary resource and meet increasing demand?
After the 2015 and 2020 price shocks, investment portfolios are subject to strict scrutiny and only the highest ranked projects proceed. Fortunately, improved technology, capital efficiency, and streamlined methods have resulted in a 60% cost reduction and 3x more production. This very capital efficiency is what will keep the $500 billion spending sufficient to meet demand over the next 10 years. This annual investment includes everything from exploring new oil fields to maintaining and upgrading current facilities.
Wood Mackenzie recognizes that upstream investing will be an uphill battle with inflation with maintenance expenses, naturally depleting oil reserves, and more. For example, producing oil from more complex and costly projects, like deep-sea drilling, may become more expensive. Therefore, keeping existing equipment in good shape and updating it will be crucial to avoid production declines and ensure a steady supply. All in all, Wood Mackenzie agrees with the status quo of investing and is confident in the oil and gas industry’s future.
IEF and S&P Global Report: Need for Increased Investment
In contrast to Wood Mackenzie’s view, the IEF and S&P Global report calls for significantly more investment in the oil and gas sector—up to $738 billion by 2030 and $4.3 trillion total investment between 2025 and 2030 to accommodate market demand. The report argues that investment in this decade will have a cascading effect in decades to come, thus allowing upstream investment to offset forecasted production declines while also meeting demand.
Outside of efficient drilling mechanics or production capacity, proper investment guarantees a more seamless energy economy, transition, and security. The past two years are a prime example of chaotic transitions, from price shocks, oil shortages during political tensions, and war to supply chain bottlenecks amid a global pandemic. Increased investment will support the energy transition in a way that allows the market to be simultaneously flexible yet resilient.
Oil production is skyrocketing in America, which takes up over 60% of capital expenditure growth until 2030. Outside of the United States, Latin America (specifically Brazil and Guyana) is an increasingly large driver of non-OPEC crude oil supply. About 2.2 million barrels per day (mb/d) have been sanctioned for production. In fact, Latin America is expected to surpass North American annual capex for the first time in 2 decades on a year-on-year basis. Without increased upstream investment, conventional oil production will drop by 20%. This can drive potential energy shortages and more price spikes.
Sustainability is also an inevitable energy transition that needs to be monitored and executed correctly. Companies are reallocating spending to decarbonizing operations, thus decreasing scopes 1 and 2 carbon emissions. This practice not only complies with regulations and investor expectations but also helps companies achieve their environmental goals. Higher upstream capex can be correlated with increased spending on methane abatement, flaring reduction,
operational and energy efficiency, and CCUS.
The projected $738 billion annual investment mentioned at the beginning of this analysis includes spending on new projects, upgrading existing infrastructure, adopting new technologies, stabilizing drivers to market volatility, and working towards a more sustainable future. This investment is crucial to keep up with rising demand and to avoid any supply disruptions.
Balancing Perspective: Investing for the Future
Considering both viewpoints, a balanced approach is necessary. Wood Mackenzie’s prediction of peak oil demand suggests that current investment levels may be adequate for managing demand over the next decade—but only if capital efficiency is maintained. On the other hand, the IEF and S&P Global report supports immediate increased spending to curb potential threats to market stability, energy transition, and supply.
A middle-ground perspective appreciates equilibrium at $500 billion a year but also understands that risk is omnipresent, especially within the natural resources space. Even though upstream investment spending has recovered from the 2020 low, it still has a long way to go. It is crucial to not only maintain current investments and supply but also proactively find ways to mitigate potential risks. For example, more investment in sustainable energy is key with countries adding more sanctions for outdated and harmful oil production procedures.
Technology will always play a key role in making investments resilient. Both Wood Mackenzie, and the IEF and S&P Global agree that emerging technologies will help reduce costs and improve production. Investing in innovative solutions, like advanced drilling techniques and digital tools, will be important for keeping costs down and improving productivity.
Statistics from both sources prove that demand is increasing, and it will be a while before demand hits a steady decline. Thus, it is critical to address the potential risks of supply shortages such as price shocks and limited availability. The reports highlight the need for investing in new projects and maintaining existing infrastructure to prevent abrupt supply disruptions; a prime example being Russia and Ukraine geopolitical tensions. A balanced strategy should include investing in traditional oil and gas capital portfolios (especially for booming markets such as Latin America) while also supporting the growth of renewable and low-carbon technologies. This approach will help ensure that energy needs are met while also supporting environmental initiatives.
In summary, although there are different views on the future of oil and gas investment, substantial investment is needed. Wood Mackenzie’s forecast of peak oil demand suggests that maintaining current investment levels might be sufficient, but challenges will arise. The IEF and S&P Global report emphasizes the need for increased investment to avoid potential supply shortages and ensure energy security and transitions. A balanced approach that includes both traditional oil and gas projects and emerging technologies will be key to navigating the changing energy landscape effectively. By adopting a strategic investment plan, the sector can ensure a stable energy supply while supporting the transition to a more sustainable future.