Underinvestment by the major global oil and gas companies risks leaving markets undersupplied and also damaging parts of OPEC that rely on the majors for financing and the ability to meet spare capacity expectations, analysts told a commodities industry event June 15.
Speaking at the FT Commodities Global Summit, JP Morgan head of oil and gas research Christyan Malek said the bank had identified a $600 billion shortfall of upstream investment needed between 2021 and 2030 to meet what he called a “muted” view of global oil demand.
This shortfall would tilt the balance in markets further toward core OPEC members such as Saudi Arabia, but ultimately could raise questions about spare capacity in member states where the majors have traditionally been active, he said. He referred to countries like Angola and Nigeria where global oil “majors” such as BP, Shell and Total have traditionally been active.
“We’ve had upstream businesses’ capex slashed to extreme levels in favor of low carbon. I like to call it the straightjacket, where you’ve got debt reduction, dividends and decarbonization essentially starving the industry of the capital we need,” Malek told the event.
Coupled with record reductions in corporate oil and gas reserves, “the course has been set for the concentration of output growth towards OPEC, oil price overshooting, particularly as non-OPEC supply falls short, and a high probability of capex increases or incentive for mergers and acquisitions,” he added.
At the same event, trading house Trafigura’s co-head of oil trading, Ben Luckock, also voiced concern at underinvestment in the upstream. Highlighting what he called an oil market “excited to get out of corona[virus],” Luckock said: “The underinvestment is real. In the last seven years we’ve lost two thirds of the exploration and production budget of the world.”
The massive underinvestment may well come back and bite the global economies before they are ready to transition into renewable fuels, Luckock said.
“That six or seven million barrels [per day] that they’re holding back on at the moment — we’re going to need it. We’re going to need it probably sooner than we think.”
The oil majors are withdrawing from some of their traditional businesses and as they retreat, OPEC will become more important, Luckock added.
Spare capacity
JP Morgan’s Malek, however, suggested it was too simplistic to divide production into OPEC and non-OPEC sources, saying the majors played a crucial role across much of OPEC with the exception of perhaps a few core members.
The majors’ “investments in countries within OPEC have reached record lows … The knock-on effect is OPEC spare capacity hasn’t been tested and is at real risk of falling short of what we see as a nameplate [daily production] number of 7 million-8 million. It’s all taking OPEC spare capacity for granted … but countries like Angola, Nigeria, Iran are at real risk of disappointing to the downside on production,” Malek said.
He warned that even as majors transition, it should be noted that they were the ones partly financing the national oil companies and their governments, particularly in OPEC and others like Mexico.
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