BAKU, Azerbaijan, June 23. Oil production is expected to consolidate in the hands of a few major players, with low-cost producers possessing extensive upstream infrastructure and proven reserves holding a competitive advantage over smaller, less diversified companies, Fitch Solutions told Trend.
The long-term outlook for hydrocarbon supply appears bleak as the demand for oil and gas is expected to decline, leading to persistent underinvestment in the upstream sector. Oil and gas producers are transforming into integrated energy companies, resulting in reduced investment in upstream operations to maintain oil prices and sustain profitability by limiting market supply. This shift is primarily driven by the changing strategies of upstream companies in response to emission reduction requirements for high carbon emitting industries, including the oil and gas sector. Moreover, the weakening long-term demand outlook discourages risky and costly investments, particularly those with substantial upfront development expenses.
The tightening grip of environmental regulations and governments' increasingly hardened stance against the fossil fuel industry pose further threats to future greenfield oil and gas projects, expediting the shift away from hydrocarbon investments. Financially, energy companies are facing windfall taxes and rising regulatory burdens, which discourage heavy commitments to future exploration and production activities.
As a result, exploration and production companies are expected to allocate more capital expenditure towards low carbon initiatives, such as emission mitigation and carbon credit offsets, at the expense of upstream and downstream projects' growth. The underinvestment among several producers will lead to a slowdown in production growth, particularly for those with a growing share of maturing fields in their upstream portfolios. Notably, the United States will witness the maturing of its prolific shale assets, causing output to plateau or decline due to decreased investments in new growth.
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