World to face oil shortage in mid-2020s amid insufficient investment

Oil&Gas Materials 2 November 2021 11:12 (UTC +04:00)

BAKU, Azerbaijan, Nov.2

By Leman Zeynalova – Trend:

There is a risk of an oil shortage around the mid-2020s due to insufficient investment over the past years, Francis Perrin, Senior Fellow at the Policy Center for the New South (PCNS, Rabat) and at the French Institute for International and Strategic Affairs (IRIS, Paris) told Trend.

“Capital expenditures (capex) by the oil industry are now much lower than several years ago. It is a matter of fact. Many observers think that there is a link between this trend and the fact that oil companies no longer intend to invest large amounts of money in oil and gas due to climate change and the energy transition. But this is not the main factor,” he said.

Perrin noted that there is another explanation to this trend, which is much more important to understand the recent behavior of the oil industry: oil prices.

“Over the past seven years oil companies went through two periods of falling oil prices, the first one between the Summer of 2014 and the beginning of 2016 and, of course, 2020 with the Covid-19 health and economic crisis. In both situations the fall in oil prices was dramatic (at least -70 percent for North Sea Brent). In April 2020, the price of Brent was $18 per barrel as against $68/b at the very beginning of 2020,” he added.

He pointed out that when oil prices are low it means that investment in oil and gas exploration and production is less profitable.

“Oil companies will then, very logically, cut their investments, which may have an impact on production some or several years later. Since November 2020 oil prices are on a very strong upward trend. On 29 October, the price of Brent for December contracts was $84.38/b (closing price), which is much higher than its level at the beginning of 2020 before the Covid-19 crisis. But oil companies remain cautious for the following reasons: it is difficult to forget the two recent periods of low oil prices; the Covid-19 pandemics is not yet over at a worldwide level ; and many of these companies registered large losses in 2020 and they want to improve their financial situation, repay part of their debts and reward their shareholders through higher dividends and share buybacks,” said the expert.

Perrin went on to add that oil companies take into account the evolution of the world energy landscape with the willingness of the international community to fight climate change, the rise of renewable energies, the development of electric vehicles and a lot of measures and policies announced in order to reduce the share of fossil fuels (oil, coal and natural gas) in the energy mix.

“But it takes some time to implement these policies, world oil demand and fossil fuels demand is up in 2021 and the world needs fossil fuels now and for many years ahead because these energies cover today a little more than 80% of global energy consumption. The energy transition will not be rapid, simple and cheap, it will be long, complex and costly. This implies that there are yet many opportunities to invest in oil and gas exploration and production even if several oil companies, mainly European ones (Shell, BP, Total, Eni), intend to become energy companies rather than oil and gas companies with activities in hydrocarbons, of course, but also renewables and power,” said the expert.

He pointed out that there is a risk of an oil shortage around the mid-2020s due to insufficient investment over the past years as explained above. “It is not 100 percent sure but we must take this scenario into account. If this scenario was to be confirmed oil prices would go on rising, and rising fast, as oil will remain the most important energy source in 2025 and beyond. That being said it is impossible to say if oil prices would reach $100/b or $150/b. Nobody can forecast oil prices.”


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