Save for later Print Download Share LinkedIn Twitter A year ago, PIW flagged 10 key issues to watch for 2021, including a challenging but successful year for Opec-plus, a shake-up in corporate strategies under climate pressures, and a fundamental shift in US energy policy under the Biden administration. We hit the mark on nine of our predictions. Here are 10 new themes we think will define the industry in 2022.Tension over the pace of the energy transition will intensify as the stakes rise for producers and consumers. Last year offered a taste of the disorderly energy transition ahead as stakeholders sharpened their positions and seemed to move farther apart, even as energy market realities clashed with political ambitions. We expect this jostling for influence over the pace and shape of the transition to intensify, fueled by high energy prices — and to dominate much of the industry narrative in 2022. Producers will step up their pushback campaign against a “flawed” net-zero pathway, using heated markets to underpin repeated warnings over supply shortages. Some consuming nations (particularly in Europe), financial institutions, and consumer groups like the International Energy Agency (IEA) will counter that a faster switch from fossil fuels is needed. The big question is whether this polarization deepens this year, or the opposing sides move toward common ground. Key to watch will be the new climate scenarios report by the UN’s Intergovernmental Panel on Climate Change, which, like the IEA's explosive net-zero pathway, could reinforce calls to cut ties with oil and gas, and the COP27 summit in Egypt, which producers will use as leverage for a stronger say on the transition. The EU's recent proposal to allow some gas projects to be classified as "green" investments after a year-long debate over whether gas is truly climate-friendly may show a path to compromise.Investors’ net-zero strategies will tighten environmental, social and governance (ESG) screws. As funds and banks start advancing their own 2050 targets, they will require credible net-zero plans from all companies in their portfolios, including significant emissions reductions by 2030. C-suite discussions will move from high-level targets to more granular disclosure and capital expenditure detail, and scrutiny of spending. Demands on Scope 3 (end-use) emissions will remain patchier, but pressures to reduce, rather than just decarbonize, production could become more common. An emerging form of “aggressive engagement” will strengthen, with board members as slow movers threatened with removal — a powerful lever for change. Calls for sweeping corporate restructuring (as at Shell) may pop up, especially as European majors’ plans become more radical. In parallel, some financial institutions will adjust holdings to reduce their portfolios’ carbon footprint, with decisions by Dutch ABP and the Norwegian oil fund offering pointers. In general, US companies are likely to be treated differently from Europeans, but with investors still demanding evidence of serious intent and real action on low-carbon adaptation.Project financing will be harder to secure, with stricter criteria. Multilateral financing institutions, including export credit agencies, will continue to retreat this year. Major commercial institutions will apply heightened scrutiny to deals. And climate advocates will use the IEA’s net-zero report to push against all new oil and gas project investment. The door will not close on project financing entirely, but these pressures will constrain the pool of available capital and raise the criteria for acceptable projects. Low emissions intensity, emissions mitigation and even integration of low-carbon investments are among the possible new requirements — as well as higher returns thresholds given deeper discount rates applied. Over time, this trend will reshape project planning in terms of development timelines, scope and resource competitiveness.An oil supply crunch is not imminent — but markets will stay tight and prices could spike. Energy Intelligence analysis of global upstream projects shows there will be sufficient liquids supply coming on stream to counter natural declines and meet new demand through 2026. Large volumes of new non-Opec supply will come from the US, Brazil, Norway and Guyana in the next few years. But inventories are low, and balances look tight in the next five years due to recent weak upstream investment, partly related to demand uncertainty and ESG pressures. This will put Opec-plus in the spotlight, with attention turning in 2022 from cuts to capacity. The group’s spare capacity could drop to as low as 2.5 million barrels per day by end-2022 as it continues to unwind cuts, leaving little cushion for any significant production outages. If the market’s focus shifts from abundance to scarcity, bullish speculative sentiment could gain momentum. Some banks see oil prices hitting triple-digits later this year. Brent set the tone at the start of the year, largely dismissing the demand threat posed by the latest Covid-19 variant and charging above $80 per barrel again. Energy Intelligence sees Brent averaging $80 this year, with potential for temporary spikes well above this level.Opec-plus will shift from Covid-19 crisis response to managing a volatile transition market. As production cuts are steadily unwound, the group’s internal dynamics will be dominated by a growing gap between leaders with spare capacity (Saudi Arabia, United Arab Emirates, to some extent Russia) and laggards failing to fulfill their rising quotas (Nigeria, Angola, Malaysia). A major reset at some point seems inevitable. An April revision of quota baselines for five key members will help, but firm prices could spur pressure for a stronger action — especially as demand rebounds heading into the summer. Expiry of existing production cuts — in September or earlier — should evolve into some form of continued cooperation to maintain a $70 price floor. But by then, attention will be switching to the group’s ability to (1) provide a supply cushion as spare capacity shrinks, and (2) keep supply and demand balanced as the energy transition advances. Opec-plus will need to stay flexible as upstream investment slows, balances become harder to predict, markets struggle for the right signals and oil prices stay volatile. The group will also have to tread carefully: Higher prices should support state coffers and give more leverage over the transition’s pace but could also aggravate consumers and accelerate the pace of change.Oil demand will return to pre-Covid-19 levels and then continue growing at a solid pace. After intense volatility over the past couple of years, there is now greater visibility around oil’s demand trajectory, despite uncertainties over virus variants, economic growth, inflation and interest rates. Full-year 2021 demand was in line with Energy Intelligence’s forecast, but with a stronger-than-expected showing at year’s end — with the fourth quarter’s estimated 100.6 million b/d not far short of fourth-quarter 2019’s 101.6 million b/d. Demand should punch through pre-Covid-19 levels in late summer/early fall 2022. We project full-year growth of 3.1 million b/d in 2022, 1.5 million b/d in 2023 and then a steady slowdown in subsequent years until demand peaks at 106 million b/d in 2028. Dampening effects from the pandemic — more working from home, less air travel — will be longer-lasting but less impactful than previously feared.US shale will return to substantial growth, but capital discipline will cap its upside potential. Shale producers are back in favor with investors thanks to capital discipline and record free cash flow, which they are using to pay down debt and reward shareholders. Energy Intelligence forecasts US crude production will grow by 700,000 b/d to average 11.9 million b/d in 2022, closing this year slightly above 12 million b/d. This would mark a strong recovery after a challenging two years. US crude output plunged by 900,000 b/d to 11.3 million b/d in 2020, and, although its rebound began in earnest last year, production still averaged just 11.2 million b/d in 2021. But with firmer oil and gas prices, a financially stronger shale sector could be positioned to increase growth rates further — so long as it keeps spinning cash for investors and the Biden administration stays out of its way. That said, US producers will not abandon capital discipline or new, lower growth models — and some are adapting to maintain dividends and buybacks at lower prices in hopes of retaining long-term investors.Upstream access will become very mixed, with some countries clamping down on new openings even as others accelerate. Policymakers in the OECD will weigh climate concerns against high commodity prices as they decide how aggressively to clamp down on upstream access. But in other countries, particularly in Latin America and Africa, governments will push upstream openings harder as they seek to monetize resources in a tightening demand window. In the US, the current five-year federal leasing program expires on Jun. 30. All eyes will be on whether the Biden administration attempts to halt leasing again or takes less aggressive measures like raising royalty rates to limit new exploration. In the UK, Shell’s withdrawal from the Cambo development could spell trouble for new large-scale oil projects if policymakers don’t reverse course and provide clearer support in the face of mounting climate pressure. In parallel, the focus of some bid rounds — for governments and companies — will start to shift from exploration toward carbon capture and storage (CCS) opportunities, particularly in the US and Australia. International oil companies will continue to target choice exploration opportunities to ensure that their portfolios are resilient to mounting energy transition pressures.Industry leaders on CCS and hydrogen will start to emerge. Progress over the next 12 months should provide clear signals on which companies are most serious about rolling out CCS and hydrogen businesses and test the credibility of strategies leaning heavily on these technologies. US companies, in particular, will need to show definite progress given their greater strategic dependency. Exxon Mobil plans two CCS final investment decisions (FIDs) for 2022, while Occidental Petroleum will break ground on its initial direct air capture plant. Industry queues need to move quickly from preliminary agreements to engineering and project sanction to get CCS on track with projected needs. Hydrogen projects are gaining momentum, but inroads are needed on demand development in heavy industry and possibly transport to justify the growing pipeline of potential schemes. European majors have become early leaders in hydrogen, putting the onus on US majors and select Mideast and Asian national oil companies to step up in 2022. Overall capital investment will increase, but discipline will prevail. An estimated 10% year-on-year increase will take capex to $420 billion in 2022. But global reinvestment rates — the percentage of capex versus cash flow — will remain near record lows around 40% as shareholder returns remain the industry’s priority. The focus will continue to be on advantaged low-cost, low-carbon barrels, with deepwater projects dominating greenfield FIDs. Short payback periods and low emissions will be prime considerations in the new upstream landscape. Companies are getting more bang for their buck these days due to much-improved capital efficiency — so while capex levels seem low compared with the $700 billion-plus recorded annually before 2015, this should not automatically sound alarms. At the same time, companies will allocate more of their capital to decarbonization and new energy businesses. Large-scale acquisitions of low-carbon or renewables firms seem unlikely due to their inflated valuations. But as the scale of renewables projects on offer increases, oil majors could see opportunity to build scale faster — and game-changing moves should not be ruled out.