October 27, 2021
In April 20, 2020, during the depths of the COVID-19 pandemic, the price for a barrel of WTI crude oil fell by 300% in a single trading day to close at negative $37.63 in the USA. On Monday, October 25, 2021, WTI opened above $85 per barrel, a rise of more than $120. The whole energy world changed in 18 months, and it will no doubt change completely again in the 18 months to come.
One thing that’s changing right now, due to largely the influence of pressure from ESG investors, is where the oil and gas is coming from. USA and international corporate producers, increasingly intimidated by this pressure, are not creating the supply response would be normally expect to such high commodity prices. Right now the supply breach is being filled by state-owned companies in Latin America, the Middle East and Africa.
These state-owned companies are not under nearly as much pressure to cut back on production and emissions. That’s because, in part, their governments are not as focused on meeting the goals set under the Paris Agreement as the USA and Europe have been, and because their political masters often want these oil companies to increase production to help pay down debt, finance government programs and create jobs.
If that is in fact the focus by big oil-producing countries and NOCs, this means that it could take decades for oil and gas production to begin to fall. But the reality, as the U.S. Energy Information Administration (EIA) reported early this month, is that demand for oil and natural gas across the world continues to grow, and will likely keep growing through 2050 and beyond.
But, as predicted earlier this year when it first became evident that we were entering a boom time for commodity prices as the global economy came roaring back far faster than the experts had projected, that supply response has been muted due to pressures on the industry from the government and ESG-oriented investor groups that control so much capital now.
This constraining pressure has been especially impactful on corporate upstream companies, which are more reliant on external capital markets to fund their ongoing operations. The ESG megatrend is pushing the investors, which will restrain O&G investments regardless whether the oil price it’s $75, $80 or $100 per barrel. The reality is that shareholders will punish the Big Oil if anybody goes back to growth production.
On the other hand, ESG-related pressures are also playing an important role in encouraging the upstream industry to clean up its act and reduce emissions, gas flaring will soon be banned someway, with some companies already eliminating it in onshore operations. Several corporations are revisiting its compensation metrics to reward employees for achieving ESG-related goals.
Globally the consequences of under-investment in the finding and development of major new oil and natural gas resources are just now beginning to rear their ugly heads. Much of Europe currently finds itself fearing a full-blown energy crisis for the winter to come, caused by its premature efforts to shut down natural gas plants. China and other parts of Asia finds themselves short of natural gas and crude oil as winter looms, and prices for all of those commodities continue to rocket up as those big consuming countries scramble to secure supplies.
As the old saying goes, everyone has a price. As prices for oil and natural gas continue their inexorable rise with almost every passing day, the question now becomes whether even those corporate producers will arrive at a price point at which they will summon the courage to inform their ESG investors that is time to drill in earnest has come!!!