Cautious approach: global O&G investing up, but well below 2019
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Global investment in oil and gas projects is rising, but it’s still far from the pre-pandemic total of $500 billion reached in 2019, according to a new report from the International Energy Agency. Plus inflation is eating away at what those investments can buy.
Capital spending by oil and gas companies is expected to total $417 billion in 2022, up nearly 10% from $380 billion in 2021, says the IEA’s World Energy Investment 2022, released June 22.
Net income for the world’s oil and gas producers is set to double in 2022 to an unprecedented $4 trillion. Much of that income goes to the big Middle Eastern national oil companies, which also are making the biggest investments in new projects, while the majors and independent oil companies are treading more softly.
In the bigger energy picture, total capital spending - including electric generation, renewables and all the rest of the energy sector - is six times as big as the oil and gas figure alone.
“Our updated tracking, across all sectors, technologies and regions, suggests that world energy investment is set to rise over 8% in 2022 to reach a total of $2.4 trillion, well above pre-Covid levels,” the report says. “Investment is increasing in all parts of the energy sector, but the main boost in recent years has come from the power sector - mainly in renewables and grids - and from increased spending on end-use efficiency.”
Even coal, once written off for dead, will have an increase of 10% in capital allocations for 2022, after a similar increase last year, as possible interruptions of Russian gas supplies lead to reopening of mothballed coal plants and other measures.
In the petroleum realm, “investment by national oil companies (NOCs), especially in the Middle East, accounted for about 80% of the increase in upstream investment in 2021,” IEA reports. “The majority of conventional sanctioned projects are natural gas projects, underpinned by a strong recovery in investment in upstream fields linked to new LNG projects.”
30% boost by US majorsU.S. majors are expected to show an increase in upstream investment of 30% for all of 2022, while European majors are essentially running at about the same investment rate as in 2021.
The shale oil companies, burned by their gung-ho approach a few years ago, are not biting so far, IEA notes, even though shale projects can add new volumes quickly to take advantage of today’s high prices. For the shale industry, investment “has been relatively slow to pick up, held back by tight supply chains as well as a continued focus among operators on profitability and capital discipline.”
Investment in new refineries and refinery upgrades was up about 30% in 2021, but it didn’t bump up throughputs, as a near-record level of refining capacity was retired in the last two years.
Middle Eastern countries are looking to boost their dwindling spare capacity, the report notes, with increased investments of 15-30% by Saudi Aramco and Abu Dhabi’s ADNOC.
Russia is more of an open question, with all the complications arising from sanctions imposed after the Ukrainian conflict exploded earlier this year.
“Russian companies, led by Rosneft, had also announced significant investment hikes for 2022, but are now reviewing their investment programs in the light of sanctions, increasing restrictions on access to Western markets, and the announced exit of international players and service companies that have supported Russian production growth in the past,” the report says.
“Prior to the invasion, Russian oil and gas players had signaled large year-on-year increases in planned investment for 2022, but these are now under review. A number of planned projects to expand LNG liquefaction and install steam crackers have been delayed or canceled.
“Banks headquartered in Europe and North America have withdrawn, limiting the availability of finance, and oilfield service and international oil companies have limited their operations or announced that they will make no new investments. In recent years, an increasing share of investment in Russia has been in projects looking to export to Asia; this share is likely to increase further,” the IEA noted.
Industry profits to double“A huge windfall awaits the oil and gas industry in 2022 from high prices,” the report says. “While this may come as a relief to producer economies that were starved of income in the immediate aftermath of the pandemic, further volatility and exposure to downside risks should not be discounted, particularly as reducing dependence on fossil fuel imports becomes as much a geopolitical priority as a climate-related one.”
Thus, while there is a huge uptick in revenues and profits for the oil and gas industry, the approach of the shale companies is muted and the majors are being cautious. They can see that the world’s energy usage - and the world’s economy - are in a period of major realignment.
- ALLEN BAKER