New IEF Report Warns Oil and Gas Investment Cuts Will Spur Higher Prices and Volatility

Headwinds for Global Economic Recovery

Riyadh, Saudi Arabia: The International Energy Forum (IEF) today released a new joint report with Boston Consulting Group (BCG) that warns weak energy demand caused by the COVID-19 pandemic and subsequent investment cuts by companies will have repercussions through a future supply shock.

"Although upstream investment has peaked for now, ongoing demand for oil and gas will necessitate an increase soon. Without sufficient investment, a reduced supply of oil and gas could lead to higher prices and greater market volatility, slowing the global economic recovery and jeopardizing energy security, and international goals," the report concludes.

The report "Oil and Gas Investment in the New Risk Environment" was presented in a virtual webinar Thursday by IEF Secretary General Joseph McMonigle and BCG Global Energy Practice Leader Alan Thomson attended by representatives of IEF member countries as well as the media and various stakeholders. The webinar was open to the public and livestreamed on the IEF website as well as on YouTube and Twitter.

The report states that capital expenditures by oil and gas companies has fallen by 34 percent this year and early assessments indicate further reductions of 20 to 30 percent in 2021.

IEF Secretary General Joseph McMonigle said the global community must continue the race to the energy transition but also needs to be cognizant of this potential new fallout caused by the pandemic. "Given that producing natural oil and gas wells decline over time, slashing investment in new production locks in lower total supply," McMonigle said. "While that may not pose an immediate threat to oil and gas markets, it won't be long before this lower supply collides with resurgent demand. The result will be higher and more volatile oil prices and headwinds for the post-pandemic global economic recovery."

Alan Thomson, BCG Global Energy Practice Leader, explained another worrisome trend that results in more impactful cuts to supply than in previous periods. "Capital expenditure cuts caused by weak demand and lower prices help companies shore up balance sheets, but we estimate that every dollar of capex that is cut today will have twice as powerful an effect in terms of reducing activity than cuts made following the 2014 price decline cycle. Then, service sector companies also reduced costs, which helped support activity. Today suppliers have less flexibility," Thomson said.

The report takes note of forecasts from the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC) that project oil demand will peak in the next ten years. However, the report states that both IEA and OPEC believe that another 27 million to 30 million barrels of oil equivalent (mmboe) will be needed by 2022 to close the gap between production declines and demand levels. The report adds that the agency forecasts expect these required levels increase to 68 mmboe to 70 mmboe by 2030.

According to the report, the IEF and BCG analysis "suggests that industry investment will have to rise over the next three years by 25 percent yearly from 2020 levels to stave off a crisis" and "substantially greater sums will be needed by the end of the decade to ensure sufficient production to guarantee market stability."

The report also states that "it is essential that the world achieve the Paris Agreement climate goals as soon as possible" but says deep investment cuts and project deferrals by oil and gas companies may undermine progress on sustainability and energy access goals. "Aside from the unequal effect that higher oil and gas prices would have on the world's population, however, governments would probably see higher fuel prices as a strategic threat," the report explained. "Many would try to increase their reserves and boost domestic oil production in a bid to strengthen energy security. Such actions might increase global upstream investment so that it delivered an adequate supply of oil and gas. But given the energy security concerns that prevail in many countries, the reserves brought online would likely generate a higher level of unwanted greenhouse gas emissions than if pure economics held sway."

The full report and webinar replay is available on the IEF website (www.ief.org/investmentreport).