Save for later Print Download Share LinkedIn Twitter What oil price does the industry require to grow production? Benchmark Brent crude hit a seven-year high of over $89 per barrel this week, and some experts are predicting $100 oil soon. How much oil the industry can quickly bring to market may be the most crucial question facing the sector today. Due to investor pressures around returns and the energy transition, producers are not responding to today’s high prices in the same way they have in the past. Public companies are winning back equity investors with overhauled business models that prioritize dividends and stock repurchases over production growth. For these firms, it could take sustained prices over $100/bbl to arrive at a new grand bargain with investors that shifts the balance toward more aggressive growth. Energy Intelligence expects industry capital budgets to rise 10% this year to $420 billion, but global reinvestment rates — the percentage of capex versus cash flow — will remain near record lows around 40% as shareholder returns remain the priority for public companies. Oil markets are worried that upstream investments are still lagging, particularly as Opec-plus spare capacity dwindles and demand continues to recover. Capex is largely focused on short-cycle projects, with an emphasis on low-cost, low-carbon barrels. Few public companies have been willing to sanction new megaprojects over the past two years — a trend that was emerging before the pandemic as investors grew tired of poor capital efficiency and began to fret about long-term demand.With public firms focused on smaller short-cycle projects like shale, tiebacks and infill drilling, the onus is shifting to national oil companies (NOCs) and private entities to bring bigger volumes into production. An Energy Intelligence analysis of the upstream project pipelines suggests markets could be tight but that there will be no supply shortage through 2026. However, an oil market that increasingly relies on “just in time” supplies from short-cycle projects could be prone to disruption and price spikes. US shale was once thought of as the market’s great swing producer outside Opec, but its commitment to capital discipline has made it much less responsive to higher prices than in the boom years leading up to 2019. Consultancy Rystad Energy sees US shale capex increasing by 19.4% this year, leaping from $69.8 billion in 2021 to $83.4 billion. But service cost inflation could consume some 67% of the increase. To be sure, shale will grow substantially — Energy Intelligence forecasts US production will grow by 700,000 barrels per day to average 11.9 million b/d in 2022 and by a further 360,000 b/d in 2023 to 12.3 million b/d. But we do not see shale eclipsing its pre-pandemic peak of 13 million b/d as companies prioritize returns, not growth. Projects in Brazil, Guyana and Norway will deliver significant supply and help satisfy demand growth in coming years, but new FIDs — largely in deepwater — will remain highly selective. Expansion programs in Saudi Arabia and the United Arab Emirates will take time to come on stream, and few NOCs in other Opec-plus countries are expected to boost capacity this decade.Front-month benchmark oil prices are showing a need for more oil now, but the forward curve is in backwardation, pointing to lower prices in the future. Big upstream investments are also at odds with corporate transition plans and investors are demanding alignment between those plans and capital spending. Long-term money managers are under growing pressure to reduce their exposure to fossil fuels, constraining the industry’s access to capital. Indeed, today’s high oil prices partially reflect the climate risk premium investors demand from fossil fuels. There is a risk for the industry that another oil super-cycle accelerates the world’s effort to transition away from it. Paul Bodnar, global head of sustainable investing at the giant US investment manager BlackRock, told Energy Intelligence that the transition will take decades to unfold but the “tectonic shift” in capital markets toward more sustainable companies and assets is already under way. This is evident in the oversubscription of green equity and bonds issuances and the compression of oil sector valuation multiples in recent years. The danger is that the oil market could become stuck between a rock and hard place, where the price companies need to justify new investments is higher than society can tolerate. In such a scenario, oil demand would likely erode — either through a faster transition or slower economic growth.