Our Take: Future Oil, Gas Sector Up for Grabs

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With major Western oil companies largely retreating from upstream oil and gas as they transition toward becoming net-zero companies, a gap in hydrocarbon production will need to be filled to satisfy an increase in demand for energy by 2030. Although trading firms, private equity-backed producers and a consolidated independent sector could meet some of the shortfall in oil and gas production, national oil companies (NOCs) look best placed to step up and take a greater slice of the pie.

  • As Europe’s majors dial down oil production, growing demand this decade means a supply gap is set to emerge that will need to be filled. The International Energy Agency’s Stated Policies Scenario sees oil demand recovering to 98 million barrels per day by 2023 before reaching a plateau of around 104 million b/d shortly after 2030.

  • Yet capital markets are less inclined to invest in or lend money to publicly listed oil and gas companies that pursue business-as-usual strategies. Under societal pressure over the climate, pension funds and other large asset management firms have their hands tied when it comes to where they can invest. “ESG [environmental, social and governance] has unequivocally gone mainstream,” noted Bank of America’s Julian Mylchreest, at a panel on the future of the oil and gas industry at this week’s virtual Energy Intelligence Forum. Climate change-denying companies will be challenged when it comes to attracting capital while those that decarbonize should still see capital flowing toward them.

  • With many Western major oil companies choosing to dial down their production, other candidates are ready to step up. The Forum’s panel on trading new commodities saw the CEOs of Vitol, Gunvor and Trafigura largely agree that they expect global oil demand to be greater in a decade’s time than today. Even so, these companies are only taking relatively small positions in the upstream. Vitol’s Russell Hardy noted that, in terms of demand, “for the next 10 years, the path is clear. We do need oil and gas.” But he also emphasized that although Vitol is investing in the upstream, it is investing just as much capital into energy transition projects and other renewables opportunities.

  • Private equity will continue to be a “wonderful source of capital” given the focused nature of the PE business, according to Jason Bennett, department chair of Baker Botts’ Global Projects practice. Yet PE-backed oil and gas operators, although having more freedom than publicly listed companies, also face ESG pressures and their own capital constraints.

  • That leaves NOCs as most likely to fill the bulk of any production gap. They have the scale to do so, with the view from the Forum’s session on the future ownership of the oil and gas industry being that NOCs are more than capable of stepping up both domestically and internationally, while also having the chops to manage their way through the energy transition.

Majors, NOCs, Oil Trade, Independent E&Ps, Conventional Oil and Gas, ENERGY INTELLIGENCE FORUM 2021
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