Deepening Underinvestment in Hydrocarbons Raises Specter of Continued Price Shocks and Volatility

Rhea-AI Summary

According to a report by the International Energy Forum and IHS Markit, underinvestment in oil and gas development has continued for a second year, despite a rebound in global energy demand. Upstream investment fell to $341 billion in 2021, 23% below pre-pandemic levels. The report warns of potential price shocks and an increase in energy poverty due to ongoing underinvestment. To restore market balance, investment must return to pre-COVID levels through 2030. Factors such as price volatility and regulatory changes are complicating investment decisions.

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Negative

• Upstream investment in oil and gas fell to $341 billion in 2021, 23% below pre-pandemic levels.
• The energy crisis in Europe and Asia could become more frequent due to underinvestment.
• Increased price volatility and energy poverty are likely outcomes of insufficient upstream investment.

Oil and gas investment will need to return to pre-COVID levels and stay there through 2030 to restore market balance and meet future demand, report by International Energy Forum and IHS Markit finds

HOUSTON--(BUSINESS WIRE)-- Underinvestment in oil and gas development extended into a second year in 2021 even as global energy demand rebounded, raising the prospect of price shocks, scarcity and growing energy poverty, according to a new report by the International Energy Forum (IEF) and IHS Markit (NYSE: INFO).

The report underlines widespread concerns about the stability of global energy markets in the wake of the COVID-19 pandemic and follows a decision by several countries including the United States, Japan and India to release strategic petroleum reserves to cool prices.

“The energy crisis in Europe and Asia this winter is a preview of what we can expect in the years ahead. Two years in a row of large and abrupt underinvestment in oil and gas development is a recipe for higher prices and volatility later this decade,” said Joseph McMonigle, secretary general, IEF.

“More frequent boom-bust cycles will harm consumers and producers recovering from COVID, set back UN Climate and Sustainable Development goals and threaten global security,” he added.

Upstream investment in the oil and gas sector remained depressed for a second consecutive year in 2021 at $341 billion, 23% below the pre-pandemic level of $525 billion, the report found. Investment slumped by 30% in 2020. Global demand for oil and gas, meanwhile, has rebounded to near 2019 levels and is set to keep rising for several years.

Oil and gas investment will need to return to pre-COVID levels and stay there through 2030 to restore market balance, the report states.

However, several factors are currently making it more challenging to meet adequate investment levels this decade compared to decades past, the report says. These include record price volatility, changing government regulations, divergent long-term demand scenarios and non-standardized ESG criteria that are driving up investment hurdles and hiking the cost of capital for long-cycle projects, the report says.

Pressure on governments and industry for a green recovery is further constraining availability of capital, it says. As a result, investment decisions are becoming increasingly complex. The unprecedented level of uncertainty increases the risk profile of hydrocarbon investments and the cost of capital, reshaping investment decisions, the report states.

“Additional layers of complexity and the uncertainty that brings is fostering an environment of ‘pre-emptive underinvestment’ for oil and gas supply, where capital expenditure lags demand,” said Daniel Yergin, vice chairman, IHS Markit and author of The New Map: Energy, Climate and the Clash of Nations.

“While the energy transition proceeds, underinvesting in oil and gas before renewables and other low-carbon technologies are ready to scale up to meet energy demand could create recurrent energy crises of the kind we saw in Asia and Europe over the last few months, resulting in elevated prices and adverse economic consequences,” he added.

The next two years will be critical for sanctioning and allocating capital toward new projects to ensure adequate oil and gas supply comes online within the next 5-6 years, the report states.

Insufficient upstream investment could result in more price volatility and spur adverse economic consequences, such as wider energy poverty, more frequent scarcity and fuel switching to more polluting energy sources such as wood and coal, the report found.

“Increased price volatility would weaken the prospects for the inclusive and sustainable economic recovery that producers, consumers and governments all want. It would also complicate policy choices during the energy transition,” said McMonigle.

“Reduced investment will also make it more difficult to increase affordable access to modern energy services and improve healthy living conditions in rapidly urbanizing regions as well as remote rural areas of developing economies. While the obstacles are high for achieving adequate investment, the consequences of underinvestment are greater,” he added.

The report was written by Roger Diwan and Karim Fawaz from IHS Markit and Mason Hamilton and Allyson Cutright at the IEF. The full report is available on the IEF website.

About the IEF
The International Energy Forum is the world’s largest organization of energy ministers, composed of 71 members including both producing and consuming nations. The IEF is the global home of energy dialogue, promoting energy security, market stability and transparency. For more information visit www.ief.org

About IHS Markit (www.ihsmarkit.com)
IHS Markit (NYSE: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

IHS Markit is a registered trademark of IHS Markit Ltd. and/or its affiliates. All other company and product names may be trademarks of their respective owners © 2021 IHS Markit Ltd. All rights reserved.

View source version on businesswire.com: https://www.businesswire.com/news/home/20211207005901/en/

Jeff Marn

IHS Markit

+1 202 463 8213

Jeff.marn@ihsmarkit.com

Press Team

+1 303 858 6417

press@ihsmarkit.com

IEF: Tom Ashby, Head of Global Communications, thomas.ashby@ief.org

Source: IHS Markit

FAQ

What did the IHS Markit report find about oil and gas investment levels?

The report found that oil and gas investment needs to return to pre-COVID levels of $525 billion and stay there through 2030 to restore market balance.

How much did upstream investment fall in 2021 according to the report?

Upstream investment in oil and gas fell to $341 billion in 2021, which is 23% below the pre-pandemic level.

What are the potential consequences of oil and gas underinvestment?

Potential consequences include price shocks, increased energy poverty, and more frequent energy crises.

When will investment decisions need to be made to ensure adequate oil and gas supply?

Investment decisions will need to be made in the next two years to ensure oil and gas supply comes online within the next 5-6 years.

What is causing increased complexity in oil and gas investment decisions?

Factors such as record price volatility, changing government regulations, and non-standardized ESG criteria are complicating investment decisions.