Skip to content Skip to Search
Skip navigation

Ukraine war brings oil and gas underinvestment into sharp focus

Turkey Sakarya gas Reuters/Lucy Nicholson
The Q4 outlook on demand is quite healthy said Vitol Bahrain's managing director Kieran Gallagher
  • Third year of underinvestment, warns Riyadh-based energy forum
  • European policymakers disinvest in oil and gas in favour of renewables 
  • Fewer large deep-water investments as focus on near-field exploration

Oil and gas companies have slashed capital expenditure since a 2014 price crash and underinvestment will likely persist, despite the sector’s record profits this year, industry experts have warned. 

Saudi Aramco’s second-quarter net income of $48.4 billion was its largest since going public in 2019.

ExxonMobil and Chevron and many other international oil companies also reported milestone profits for the same period, as Russia’s invasion of Ukraine helped propel Brent crude to a 10-year high in June and natural gas to a 14-year peak in August. 

Yet 2022 will be the third straight year of underinvestment in the industry, according to the Riyadh-based International Energy Forum, which in June warned that the Ukraine war, inflation, supply chain disruptions and labour shortages would likely cause this shortfall to continue. 

European policymakers’ pushes to disinvest in oil and gas in favour of renewables has also been a factor, with the president of the European Investment Bank in January 2021 declaring that “gas is over”.

“As long as politicians are tub-thumping, saying we don’t want hydrocarbons, why would energy company executives make 20 to 30-year timeframe investment decisions of billions of dollars?” said Dr Patrick Allman-Ward, chief executive of Sharjah’s Dana Gas.

“They’re being told that these will end up as stranded assets,” he added, noting investment in new oil and gas projects will remain markedly below pre-2014 levels. 

“There will be less and less investment by international oil companies in long-term projects – there will be fewer new deep water, large-scale, expensive investments. Instead, there will be a continued focus on near-field exploration where you can bring gas or oil to market in a few years,” Allman-Ward said.

“Such opportunities will go ahead, but it’s increasingly the (state-owned) national oil companies who will be making those kinds of long-term investments that enable increased production, rather than the international oil companies.”

Amin H Nasser, president and CEO of Saudi Aramco. Picture: Reuters

That will lead to national oil companies taking a larger market share.

“The baton passed from the international oil companies towards the national oil companies some years ago and that trend will continue,” said Allman-Ward.

Industry capital expenditure (capex) increased less than 10 percent year-on-year in 2021, despite oil prices rising 70 percent, Deloitte estimates. 

“Significant investments could be required to strike a careful energy balance,” Deloitte wrote in an August report, estimating the oil and gas industry must invest $3.6 trillion from 2022 to 2030 “to maintain operations and generate significant cash flows”. 

In the first quarter of 2022, oil and gas companies spent 50 percent of the cash they generated on capex, with 11 percent going towards share buybacks, 26 percent on dividends and 11 percent on servicing debts. That compared with 2015 when firms spent 79 percent of their cash on capex. 

The upstream sector should generate surplus cash of $1.5 trillion from 2022 to 2030 – about 70 percent of which will be made by 2024-end – which could fund its core oil and gas and low-carbon “priorities” this decade, Deloitte estimates.

“Large annual investments in oil and gas production are required to offset normal depletion, even more is required to grow net production,” ExxonMobil’s CEO and chairman Darren Woods told a July analysts call.

“Given the long investment cycle times, growing supply will not happen overnight.”

EU policymakers have reduced their anti-hydrocarbon rhetoric since imposing wide-ranging sanctions on Russia that have left the bloc facing a dire energy crisis. 

“If you haven’t invested sufficiently in the new system that will replace the old system, then you end up where we are today, which is a big mess,” said Dana’s Allman-Ward, noting that hydrocarbons provide around 80 percent of global energy.

“The immediate impact is there won’t be sufficient supply to meet demand, so gas prices will remain high until at least 2026 or 2027, when the next generation of LNG plants, particularly in Qatar and the US gulf coast, start production.”

In June, the EU said it supports Norway’s “continued exploration and investments to bring oil and gas to the European market”, describing Norwegian gas as producing low carbon dioxide and methane emissions and predicting the country could be a supplier to Europe beyond 2030. 

“That’s an acknowledgment we still need oil and gas investments,” said Dr Carole Nakhle, chief executive of London-based consultancy Crystol Energy, noting the more pragmatic tone among officials should give investor companies greater confidence to commit to spending.

“It’s an encouraging high price environment, which should by itself stimulate investment along with this new support from policymakers.”

The industry tends to rely on debt to finance capital expenditure, so rising interest rates will increase development costs and could cause new projects to be delayed, the IEF warns.

Yet interest payments are usually deductible from corporate tax, although the extent of tax relief depends on each producer country’s regulations.

“We should expect more investment in oil and gas, but if there’s a recession that will pressure prices and could cause another investment downturn,” added Nakhle.

“It’s not necessarily that everything’s going to look fantastic from now on, but at least there are encouraging signs.”

Latest articles

Nature, Undersea cables account for as much as 90 percent of Europe-Asia telecommunications, Water

Iraq and Kuwait team up for European telecom corridor

Iraq’s Informatics and Telecommunication Public Company, a division of the Ministry of Communications, has signed an agreement with Kuwait’s Zajil Telecom to create a telecommunications corridor from the Gulf region to Europe, transiting through Iraq and Turkey. The new route will pass through Iraqi sea and land ports. Iraq’s minister of communications Hayam Al-Yasiri said […]

An artist's impression of part of the Diriyah Square development

Diriyah Square planned for historic Riyadh district

A public space featuring 400 retail outlets and 100 restaurants and cafes is planned for the historic Riyadh district of Diriyah. Diriyah Square will be announced next week at the World Retail Congress in Paris and aims to attract a combination of international retail brands and local artisans.  Diriyah Gate Development Authority group CEO Jerry […]

Turkish crude steel output rose 25% year on year to 3.2 million tonnes in January

Turkish steel in the black but EU rules rankle

Turkey’s steel industry has rebounded strongly from a weak 2023, despite facing new emissions standards and competition for important markets.  Crude steel output rose 25 percent year on year to 3.2 million tonnes in January, with domestic consumption of finished steel reaching 3.5 million tonnes, a 20 percent increase.  Exports were also up, increasing 23 […]

Passengers at Beijing Capital International Airport. Air China will fly from the airport to Riyadh three times a week.

Third Chinese airline to launch flights to Saudi Arabia

Air China is set to begin flights to Riyadh in May, becoming the third Chinese airline to establish a route to Saudi Arabia. It joins China Southern and Eastern Airlines in connecting China with the kingdom.  Air China’s Airbus A330-300 will serve the Beijing-Riyadh route three times a week. The expansion in capacity between the […]