Investment Crisis Threatens Energy Security

Executive Summary

• Oil and gas upstream investment will need to increase and be sustained at near pre-COVID levels of $525 billion through 2030 to ensure market balance despite slowing demand growth. Upstream investment in the oil and gas sector in 2021 was depressed for a second consecutive year at $341 billion – nearly 25% below 2019 levels. Meanwhile, oil and gas demand is now near pre-pandemic highs and will continue to rise for the next several years, particularly in developing countries.
• The investment environment for the oil and gas sector is becoming more challenging in the face of unprecedented uncertainty and risks, including record price volatility, evolving government regulations, increasingly diverging long-term demand narratives, and non-standardized ESG criteria. The lower-price cycle of the past six years and long-term demand debates have driven up investment hurdles and the cost of capital for long-cycle oil projects. This is fostering an environment of “pre-emptive underinvestment” for oil and gas supply, where investments are lagging robust demand.
• The next two years (2022-2023) are critical for sanctioning and allocating capital toward new projects to ensure adequate oil and gas supply comes online within the next 5-6 years. Operators will continue to favor projects with access to existing infrastructure as these require less capital, have shorter payback periods, and are more insulated from long-term demand risks. Fear of a mismatch between demand and future supply could start to materialize in this time frame.
• The role of US unconventional production (shale) in the global supply mix is evolving, bringing conventional investment trends back to the fore. The swift growth in US production both masked the impact of pre-2020 lower investment in conventional production and amplified it post-2020. While the unconventional resource will remain an important component of new oil and gas supply through the next decade, consolidation of the industry and more balanced spending behavior will structurally limit US’ supply response, compared to the tremendous growth over the past decade.
• Transparent and standardized greenhouse gas emissions data is essential as sustainability plays an increasingly important role in strategic planning and financing. Emissions data could be key for future investment during the energy transition. Projects with low breakeven prices, carbon, and methane intensities will be preferred over projects with less favorable attributes.
• Insufficient upstream investment would result in more price volatility and spur adverse economic consequences. 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.
• Concerns about lower future investment can inflate prices. Delayed investment decisions and the increased reliance on short-cycle production increase the uncertainty surrounding the source of the future output. Increased uncertainty around future security of supply can add a premium to prices.

Key Figures

Figure 1 - Upstream investment needs to increase despite plateauing demand

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Figure 2 - Current non-OPEC production would fall by 20 million barrels per day by 2030 without further upstream capex investment

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