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

Boat, Transportation, Vehicle

Bahri withdraws bid for Danish logistics company

Saudi shipping giant Bahri has withdrawn from the race to acquire Deutsche Bahn’s logistics unit Schenke, according to a news report. The CVC-led consortium, including Abu Dhabi Investment Authority (ADIA) and GIC, and DSV, a Danish logistics group, are the only two contenders left, Reuters reported, citing unnamed sources. Bahri’s offer was the highest at […]

Over the first half of the year Sanad Group signed deals with international airlines including Asiana Airlines and Deucalion Aviation

Mubadala-backed Sanad Group reports 53% revenue growth

Sanad Group, the Abu Dhabi-based global aerospace engineering and leasing company, has seen revenues increase by more than half over the first six months of the year. Figures released to AGBI show revenue totalling AED2.3 billion ($620 million) was reported in the first half of the year, up from AED1.5 billion over the same period […]

Malaysia’s HSS Engineers Berhad and its emirati consultancy HSS signed the deal top oversee construction with the Baghdad municipality

UAE company in joint venture to build Baghdad metro

A Malaysian engineering company and its UAE affiliate have jointly won a $316 million contract to oversee the construction of the new Baghdad metro. The building of the planned 148-kilometre network and its 64 stations across the Iraqi capital was slated to begin this month and end in 2029. This timeline might be delayed, however, […]