Decarbonization and capital market reactions may lead to persistent structural underinvestment in oil and gas
FREMONT, CA: Capital markets' reluctance to invest in oil and gas, as well as the dissonance between government, consumer, and investor perceptions of how quickly oil and gas should or can be replaced as well as the very real inertias that will impede that transition, are becoming increasingly apparent as people approach 2022.
Market trends in 2021 demonstrated unequivocally that oil and gas commodities were structurally undersupplied. Historically, this would have meant tremendous returns and a rush to invest, but people are not in the past. As a result, anticipated tensions between rising energy costs and emission reductions may rekindle debate over energy reliability and affordability.
Stay ahead of the industry with exclusive feature stories on the top companies, expert insights and the latest news delivered straight to your inbox. Subscribe today.
The pressure to decarbonize coupled with the financial markets' reaction may result in persistent structural underinvestment. However, 2021 demonstrated that the laws of supply and demand had remained constant.
The oil and gas industry is under constant attack. It has historically been viewed as a villain during periods of high fuel prices and ignored during periods of low fuel prices, and the danger of climate change has reinforced that image. Government action to decarbonize the energy complex is becoming increasingly certain, and regardless of the destination, the journey will be lengthy and expensive. Regardless of industry constraints, expanding populations seek affordable and reliable energy.
While renewable energy penetration and electric vehicles are increasing, the impact on oil and gas consumption remains microscopic. Populations and economies will continue to rise, necessitating and requiring reliable, inexpensive energy. Until fossil fuels are completely phased out, oil and gas demand will continue to grow.
This creates a chance for certain businesses to achieve scale and earn higher returns if they are ready to take a risk and architect their businesses for success. The integration adds value to a collection of assets by integrating them (virtually or otherwise) and reducing or avoiding impediments to operation optimization—this will be a critical differentiator for energy organizations. Energy value chains are intricate, and leakages occur at each node when buyers and sellers waste time and miss opportunities to connect. Numerous sectors have grappled with determining which components of the value chain should be integrated and kept separate. Petroleum and natural gas firms are no exception. The most significant impediment to integration has been information; the digital era has created a new dynamic in which people see tremendous promise.