The answer to OPEC’s investment dilemma is in its own hands

Reuters

Shortly before his untimely death in July, OPEC secretary-general Mohammad Barkindo said “the oil and gas industry is under siege”. He cited examples of years of underinvestment, Russia’s war in Ukraine, sanctions and environmental pressure to divest from the sector. 

In March, UAE energy minister Suhail Al Mazrouei said it was not possible to underinvest and preach renewables – and then ask for boosts in oil production during a crisis. “We are again expected to be superheroes. It’s not going to work like that,” he said.

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In February, Saudi oil minister Prince Abdulaziz bin Salman said the sharp decline in oil and gas investment threatened energy security.

But who is really underinvesting?

Global capital spending on oil production peaked at about $600 billion in 2014. It slumped after that year’s price crash to around $300 billion per year, and was then slashed further following the pandemic. It has now crept up back to $300 billion or so. The big five Western super-majors – Shell, ExxonMobil, Chevron, TotalEnergies and BP – account roughly for a 10th of this.

Investors were burnt by poor returns, particularly in the US shale sector. Capital expenditure was deterred by predictions of “peak oil demand”, demands for oil firms to commit to net-zero carbon trajectories, and court cases such as the May 2021 ruling in the Netherlands ordering Shell to reduce emissions from its products 45 percent by 2030.

If we look at the underinvestment thesis in terms of countries, the picture is quite different.

Non-OPEC+ supply is forecast to grow 2.15 million bpd this year and 1.71 million bpd next, led by the US, with other contributions from Canada, Brazil and Norway, as well as new entrant Guyana.

Major discoveries have been made in countries such as Uganda, Kenya, Côte d’Ivoire, Suriname and Namibia that could enter production over the next few years.

Meanwhile, the OPEC+ supergroup has steadily increased production limits since early last year. But actual output has been at least 1 million bpd short of the target from February 2021. The gap ballooned after February 2022 and now stands at more than 2.8 million bpd.

The main strugglers have been Nigeria and Angola but in recent months virtually everyone has been below their quota.

Russian output slumped after its invasion of Ukraine in February due to buyer reluctance. It has recovered somewhat in the past couple of months but towards the end of this year the EU ban on imports will come into effect.

Kazakhstan, which had tended to over-produce, has been hit by Russian manipulation of its key export pipeline.

Only Saudi Arabia and the UAE retain significant spare capacity – about 2.6 million bpd between them. Saudi Aramco plans to boost capacity from 12 to 13 million bpd, but will only get there by 2027.

Crown Prince Mohammed bin Salman indicated that 13 million bpd would be the ultimate ceiling – one imposed by policy, not geology.

Abu Dhabi National Oil Company (ADNOC) is aiming at 5 million bpd capacity by 2030, from about 4.2 million bpd today.

Kuwait’s expansion plans are mired in domestic politics. Iraq has cut back its growth target to 6 million bpd by 2027, a rise of about 1 million bpd gain on current levels. However, it still has no permanent government, 10 months after elections, and the constitutional and oil sector crisis with the autonomous Kurdistan region is worsening.

So optimistically, OPEC capacity might increase by 2.8 million bpd over the next five years, and that does not account for natural or politically induced declines in the other members.

International companies would be happy to invest in countries such as Nigeria, Algeria, Iraq, Libya and Kuwait, given their huge resources of low-cost, low-carbon oil.

But they are barred, either absolutely or practically by insecurity, unattractive business conditions, punitive fiscal terms, and bureaucracy. American or general Western sanctions keep them out of Iran, Venezuela and now Russia.

If OPEC members – particularly those whose capacity is stagnant or declining –believe in the underinvestment thesis, they should either open up to more international participation or direct their state companies to boost output.

If they require funds they would have no problem raising them on international markets. ADNOC and Aramco have brought in tens of billions of dollars of outside capital in recent years from IPOs and sales, or securitisations of strategic minority stakes in their subsidiaries.

The oil market has been exceptionally volatile since 2020 and a gloomy long-term outlook has been overlain by a bright short and even medium-term one.

It is understandable that OPEC countries have been cautious. But over the next few years, their choices lie between an undesirable price spike and demand slump, an erosion of spare capacity to wafer-thin levels, or making a bold but risky commitment to reverse underinvestment.

Robin M Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis