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What the Oil Industry Should Look Out for in 2023

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A year ago, PIW flagged 10 key issues to watch for 2022, including tension over the pace of the energy transition, the potential for an oil supply crunch and price spike, and an uptick in hydrogen and carbon capture and storage (CCS) projects. Although we hit the mark on most of our predictions, the Ukraine war provided an unexpected jolt to energy markets and changed the sector’s trajectory on multiple fronts. After a tumultuous year, here are 10 new themes we think will define a changing industry in 2023.

  • Energy security will stay firmly at the top of the agenda. Near-term oil and gas supply will remain a priority, particularly in Europe and Asia. Europe will again face the greatest challenges: It has adapted well to a Russian crude embargo but could face bigger problems with natural gas — especially if Russian supplies fall further and Asian demand rebounds — and refined products, where alternatives could be harder to source after the embargo’s second phase kicks in Feb. 5. One key question to watch is whether the renewed focus on oil and gas proves largely a temporary response to immediate problems or leads to greater acceptance longer term. This security-climate tussle will play out in government halls, corporate boardrooms and international forums such as Opec-plus and COP. So far, the energy crisis has largely hardened positions rather than promote common ground, with each side citing it as cause for slowing or speeding the low-carbon transition.

  • The energy transition will continue to accelerate despite headwinds. Pressing needs to secure energy supplies and insulate populations from soaring costs will continue to muddy emissions progress and divert policy attention away from climate (particularly for Europe, but also in Asia). But we see this as cementing the transition’s untidy trajectory, not derailing it. Sustained momentum in clean technology deployment, long-term decarbonization pressures on corporates and financial institutions, and alignment between energy security and renewables in some regions mean the transition should still accelerate this decade. Signposts to watch this year include accelerating sales of electric vehicles (EVs), the pace of renewable power deployment, and progress in advancing hydrogen and CCS (especially in the US). At the same time, we will also be watching for signs of wider acceptance of “all-of-the-above” country and corporate transition strategies that include fossil fuels, and wider regional divergence to protect domestic considerations.

  • Geopolitics and policy will be a big force in energy markets. Both Russia and the West will continue to use energy as a weapon in the Ukraine conflict. At minimum, Europe’s embargoes, the G7 price cap and Russia’s remaining gas supplies to Europe will be key to watch. But also on the radar should be threats of broader “hybrid” warfare affecting energy infrastructure and the conflict's impact on broader alignments, particularly involving Russia, China, India and the Mideast Gulf. The war intensified tensions between oil producers and consumers, and had geopolitical impacts from Iran to Venezuela and Taiwan — all of which will need to be watched in 2023. National policy will also be a key factor, as governments seek to reconcile competing priorities of securing near-term supply while promoting a more rapid transition away from fossil fuels. Most consumer nations, even those with large oil and gas industries like the US, continued to focus on the transition in 2022 through government responses to the crisis such as the US Inflation Reduction Act (IRA), the REPowerEU package in Europe, Japan’s Green Transformation, South Korea’s aim to increase the share of nuclear and renewables, and ambitious clean energy targets set by China and India. This year should provide signals on how effectively these new policies accelerate the rollout of renewable technologies in practice.

  • Europe’s energy system will change radically. The coming year will see the impact of Europe’s sweeping plans to further cut its reliance on Russian hydrocarbons. At the same time, market interventions (embargoes, price caps, windfall taxes) threaten to upend the competitive landscape, undermine market-based policies and potentially distort signals needed to ensure sufficient alternative supplies. These combined forces will affect energy markets far beyond the continent, from global oil flows to LNG’s demand growth in Asia. EU embargoes on Russian oil and dwindling flows of Russian gas will also force member states into tight global markets, potentially elevating the geopolitical importance of relations with Turkey, Qatar and North Africa. High prices will challenge Europe’s remaining heavy industry and pressure governments to bail out consumers and industrial users and consider further direct market intervention. Weather presents a crucial variable; abnormally warm or cold weather could dramatically help or hinder efforts to contain power and gas prices, informing the scope of further government action. At the same time, Europe will seek to accelerate its shift away from fossil fuels in another key, but longer-term, trend.

  • Russian oil exports will complete their eastward shift. The full-scale reconfiguration of Russia’s 4.3 million barrels per day of westbound oil exports — the big market event of 2022 — will culminate this year as EU embargoes take effect on crude (from December 2022) and products (February 2023). The impact will be key to global oil balances. Initial data showed a sharp drop in Russian exports after the Dec. 5 crude embargo; the question is whether this represents a temporary fall while markets adjust — as occurred after last February’s Ukraine invasion — or the start of a more permanent reduction of Russian supply. This mainly depends on the appetite of new buyers India, China and Turkey. India is already taking substantially more, having upped volumes from 50,000 b/d in 2021 to 850,000 b/d for much of 2022 and over 1 million b/d in December. Chinese buyers may be more cautious as they wait to see how new G7 shipping restrictions play out. Product exports could be disrupted more severely given tanker constraints and challenges finding large alternative markets for Russian diesel, fuel oil and naphtha. Energy Intelligence’s base forecast sees Russian liquids production falling by 1.35 million b/d in 2023 — but this is a working number that would be revised if markets adjust.

  • Global oil demand will hit a new record, fully recovering from the pandemic. Despite recessionary pressures and uncertainty about China, Energy Intelligence sees global oil demand growing by 1.5 million b/d to 101.2 million b/d in 2023. This will exceed the former high of 100.6 million b/d in 2019. Such growth would cap three years of recovery from the massive Covid-19 hit, with demand largely resilient to inflation, supply disruptions and recession threats. This could make it challenging for markets to compensate for any significant loss in Russian exports. The path ahead for China will be critical— we expect a bumpy reopening with fits and starts that will add to market volatility. Ultimately, our forecast sees China contributing 660,000 b/d of demand growth in 2023, helping offset weak Western economies (particularly Europe). Limited supply, highlighted by thin spare production capacity and continued upstream spending restraints, are likely to keep Brent prices elevated — around an average of $100 per barrel this year. Going forward, however, sustained higher prices and transition pressures will grate on demand growth later this decade, with demand peaking around 106 million b/d, according to Energy Intelligence’s long-term forecast.

  • Opec-plus will target a calmer market. After a choppy 2022, the group is expected to target a more stable range around $80-$90/bbl Brent, viewing swings above $100 and back as too volatile. Opec-plus has eased back on meeting frequency, but will continue to monitor the market closely as it navigates deep uncertainties around Russian supply, Chinese demand and the global economy. Tweaks to its 2 million b/d cut agreement are possible, but any output increase would require a clear demand pickup or supply disruption. A bigger cut is possible if a deep recession hits demand hard. The threat of renewed US-Saudi tensions over Opec-plus policy will remain, but would likely require some combination of a Russian supply disruption, higher prices, lack of Opec-plus response and fresh US strategic stock releases. Moscow, keen for allies, seems likely to avoid any move to upset Opec (such as overt shut-ins to hit the West), although surprises cannot be ruled out. In general, Saudi Arabia will be reluctant to use too much of its spare capacity. The United Arab Emirates still wants a higher quota to match capacity growth, which could lead to a reset at some point. But groupwide renegotiation of quotas will remain controversial, and, with Gulf states keen to avoid tension, this could remain on hold.  

  • The long-term outlook for natural gas may become clearer. High prices, geopolitical tensions and climate concerns have thrown the future of gas as a transition fuel into doubt as consumers in Europe and Asia struggle to cope with the termination of cheap pipeline of gas to Europe and a realignment of global LNG flows. The International Energy Agency (IEA) believes the war and crisis will accelerate the rollout of renewables, increasing their cost advantage versus gas in power generation, despite recent inflation. The IEA recently slashed its 2050 global gas demand estimate by 15% and 31% under its “stated policies” and “announced pledges” scenarios, respectively. On the other hand, our analysis still sees some strong longer-term drivers for LNG demand, particularly in countries with declining domestic production or gas requirements beyond power generation. Still, for gas to regain momentum, more supply will likely be needed in the short term to reduce prices. Other indicators to watch in 2023 include long-term LNG supply contracting and new project final investment decisions. The industry will also face pressure to accelerate efforts to reduce methane emissions, which came into greater focus at the recent COP27 climate summit in Egypt due to their outsized contribution to global warming.

  • Environmental, social and governance (ESG) pressure will continue, but with mixed messaging and reduced transparency. Flash points from the energy security-climate tug-of-war are expected to affect the pace, but not direction, of financial climate action. Risks of a slowdown are greatest in the US given increasing politicization of ESG. Here, we’ll watch for signs of tangible reversal in investor climate commitments, versus a loss of transparency to avoid scrutiny (the more likely outcome, in our view). Elsewhere, particularly in Europe, banks will likely continue quantifying plans to reduce fossil fuel exposure. But it will be worth watching how institutions respond to stakeholder demands for swifter cuts to fossil fuel lending, including total financed emissions and exclusion of specific activities (e.g. exploration, new oil developments), amid resurgent energy security concerns. Oil and gas companies are expected to at least maintain existing low-carbon strategies, given significant lead times to meet longer-term climate objectives.

  • Clean technology deployment will speed up, despite near-term cost pressures. Supply-chain issues and rising materials costs have interrupted a multiyear decline in renewable electricity kit and EV battery costs, but we see deployment continuing its accelerated path in 2023. Competing pressures will continue to play out in EV sales, with increased policy support (phaseouts of sales, penalties for conventional vehicles) and consumer appetite counterbalanced by constraints around critical battery materials and charging capacity. China’s record renewables additions (about 160 gigawatts) and EV uptake (one-third of new auto sales) in 2022 should support sustained momentum there, given consumer sentiment shifts and Beijing’s commitment to grid and charging infrastructure. Europe’s renewables-led energy security goals should underpin faster momentum there, as would permitting reform in the US — although strict US EV tax credit provisions could temporarily stunt accelerated growth in that space. In emerging areas of CCS and hydrogen, a key question is how policy support, particularly in the US, moves projects from memorandum of understanding to FID this year, creating a path for cost reductions via scale and technology advancements.
Topics:
Oil Demand, Gas Demand, Policy and Regulation, Low-Carbon Policy, Methane Emissions, Carbon Capture (CCS), Hydrogen, Biofuels (incl. SAF), Renewable Electricity , Opec/Opec-Plus, Ukraine Crisis
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