Europe’s gas crisis has been in the headlines for months now, and for good reason – the continent is still struggling to get enough power for its winter needs. But there could be a worse crisis threatening the world, and that would be an oil crisis. The signs are there for everyone to see if they bother to look: OPEC’s spare capacity is shrinking, new discoveries are at historic lows and banks are increasingly reluctant to s engage in the oil and gas industry due to the rise of ESG investing. Meanwhile, supermajors are limiting production as they focus on growing their low-carbon business.
A capacity crisis?
“The reduction in global spare capacity underscores the need for increased investment to meet longer-term demand,” the International Energy Agency said in its October 2021 Oil Market Report. after noting that as OPEC ramps up production under its back-to-normal agreement, its spare production capacity will shrink significantly, potentially reaching just 4 million bpd by the fourth quarter of this year. That would be more than halved from the 9 million bpd at the start of 2021.
Unused capacity is an important indicator of production flexibility in the oil world. The IEA defines it as production that can be launched within 90 days and maintained over a long period. The US Department of Energy defines unused capacity as production that can be operated within 30 days and sustained for 90 days. According to the EIA, OPEC spare capacity could fall to 5.11 million bpd by the end of this year.
The IEA doesn’t seem to be sure what it wants – more oil investment or more renewable energy investment. He called both on different occasions last year. But based on the evolution of oil prices, it seems that the shrinking spare capacity of the global oil cartel is indeed a cause for concern despite the planned shift to low-carbon energy. Related: Russia’s natural gas threat is far from subtle Further fueling this concern is that some members of the expanded OPEC+ cartel are approaching the limit of their spare capacity, and Russia is one of them. One of the world’s leading producers is struggling to bring production back to pre-pandemic levels at a time when other OPEC+ members are facing the same problem, according to reports. This means that even if demand continues to grow at the current strong pace, supply may not be as quick to catch up.
Wanted: new oil discoveries
New oil and gas discoveries may have hit a 75-year low, the Norwegian energy consultancy said in a December report. Total newly discovered resources last year amounted to some 4.7 billion barrels of oil equivalent, down from the 12.5 billion barrels of oil equivalent discovered in the first pandemic year.
At the same time, European supermajors are deliberately reducing their oil production in line with the strategy of shifting to renewable energy under pressure from shareholders, activists and governments. So on the one hand we have less money spent on new supplies and on the other hand we have a deliberate reduction in existing supply.
The low level of discoveries means that reserve replacement rates have also declined, and low reserve replacement rates in the oil and gas industry are bad news for future supply. Saudi Arabia warned last year that underinvestment in new oil production could lead to an energy crisis, but since everyone expects Saudi Arabia to say something like this, few attention was paid to the warning. And even if it did, increasing the rate of new oil discoveries isn’t as easy as it used to be.
Banks on an ESG rampage
The rise of the ESG investor has caused a stir in the financial sector. Returns are still a priority, but it is no longer the only ultimate priority. Today’s investors want to know that their money is being used responsibly, for the good of the planet. And that means they are increasingly reluctant to see that money going to the oil industry.
Due to this trend, banks and asset managers are rethinking their own business strategies. Asset managers require their clients to make emission reduction pledges, threatening to abandon them if they don’t. Banks refuse to lend to the oil industry and also threaten to abandon customers who generate a lot of carbon dioxide emissions.
Related: Study: Electric vehicle adoption in Europe is about to explode
It is not just shareholder pressure that drives lenders. Regulators are also putting pressure on banks, demanding new risk assessments based on climate change scenarios and tightening capital requirements accordingly. To avoid being crippled by regulation, lenders are reducing their exposure to the doomsday oil and gas industry.
Meanwhile, oil demand looks healthier than ever and oil price forecasts point to solid upside potential. What the oil bears who cite the energy transition as the reason for their decline seem to forget is that it will take much more than a few years.
It will also be difficult, as Tom Cloza of the Oil Price Information Service wrote in an opinion piece for CNN.
“Once we really start moving away from fossil fuels, it will be expensive and painful. Denying this expense is as dishonest as denying climate change,” Cloza wrote. needing millions and millions of barrels of oil in the observable future would be a waste of time.
By Irina Slav for Oilprice.com
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