CALGARY, Alberta – Government policies to fight climate change are discouraging oil companies from investing heavily in new production even as they turn in record profits – a dynamic that could spell tight supply and high prices as clean energy alternatives seek to fill the void.
Crude oil prices have surged above US$90 (S$123) a barrel and some analysts predict they will nudge above US$100 by year’s end. But instead of spending big to boost output, companies are boosting dividends or buying back shares to reward investors.
Environmental groups say slowing production growth could accelerate a move to renewable energy and curb carbon emissions. However, lack of drilling investment could exacerbate energy shortages in poor countries and fuel inflation, company executives warned at the World Petroleum Congress in Calgary this week.
“If we don’t maintain some level of investment in the industry, you end up running short of supply which leads to high prices,” Exxon Mobil CEO Darren Woods said. He said oil and gas reserves are depleting at 5 per cent-7 per cent annually, and output will decline if companies stop investing to replace them.
“The current transition shortcomings are already causing mass confusion across industries that produce and or rely on energy,” said Aramco CEO Amin Nasser. “Long-term planners and investors do not know which way to turn.”
Global upstream investment is expected to reach US$579 billion in 2023, a modest increase from the annual average of US$521 billion between 2015 and 2022, according to consultancy Rystad Energy. That period encompassed the 2014-15 oil price crash and the Covid-19 pandemic.
Oil and gas investment peaked in 2014 at US$887 billion.
Investment looks “flattish” during the next two to three years, and may start to drop in 2026, as electric vehicle adoption and government emissions policies start flattening oil demand, said Mr Aditya Ravi, Rystad’s senior vice-president of upstream research.
The International Energy Agency warned last week that oil demand will peak by 2030.
Uncertainties about government policy are a bigger factor restraining investment, said Mr Alex Pourbaix, executive chair of Canadian producer Cenovus Energy.
“If you want to add 100,000 barrels a day of production, you’re going to spend billions and billions of dollars,” Mr Pourbaix said in an interview. “In terms of any real meaningful investment in large projects, that’s probably going to have to wait for some more clarity on the government front.”
The Canadian government has not finalised subsidies for projects to capture and sequester emissions and is developing a cap on oil and gas emissions.
Major consumers, including the United States and the European Union, have also adopted ambitious policies to accelerate the transition from fossil fuels to cleaner energy sources as they seek to deliver on emissions reduction pledges made under the Paris Agreement, a global pact to fight climate change.
Deloitte recently reported that investors holding US$2.3 trillion of equity in the global oil and gas industry are changing expectations about growth markets for energy faster than company executives.
About 43 per cent of surveyed investors, for instance, emphasised battery storage as their key area for investment.