New factors holding back energy investments when world needs it most, IEF warns

Rising inflation and borrowing costs, Russia’s invasion of Ukraine, supply chain problems and policy confusion are all holding back new investment in upstream oil and gas at a time when the world needs it most, the Secretary General of the International Energy Forum (IEF) warned on Wednesday.

According to IEF’s updated Oil and Gas Investment Outlook, investment in 2020 and 2021 in the oil and gas sector was about 25 percent below pre-pandemic levels, and 2022 was on track to mark a third consecutive year of spending shortfalls compared to 2019.

“A growing storm of new factors is worsening the underinvestment problem and creating a red alert for energy markets,” Joseph McMonigle, the Secretary General of IEF, said. “At a time when the global energy crisis calls for more supply, underinvestment in hydrocarbons will be the main reason for supply shortages, higher prices and volatility for the foreseeable future,” he added.

One of the key findings of the report was that oil and gas upstream investment would have to increase to and be sustained at pre-COVID levels of $525 billion through 2030 to ensure market balance.

However, McMonigle pointed to recent events such as the Ukraine crisis, inflation, supply chain disruptions, and labour shortages as increasing the likelihood that the shortfall would persist. Since December, the hurdles for meeting investment targets and securing future supply have only moved higher and become more difficult to reach, he said.

“Energy markets were already tight before the Russian invasion of Ukraine due to the investment crisis and rising demand as the world unlocked from the pandemic. Based on current data, we see more trouble ahead in the second half of 2022. Commercial and strategic inventories are low, spare production capacity is dwindling, and China and other parts of Asia are expected to end travel restrictions, boosting demand,” he added.

According to the IEF, new investment in upstream oil and gas was not in contradiction with efforts to eliminate carbon dioxide emissions, but badly needed to maintain economic stability as policy makers manage a long-term transition to net-zero. He also encouraged governments to invest in decarbonization technologies such as carbon capture and hydrogen.

“We must continue to advance the energy transition while investing in hydrocarbons to power the global economy. But I am concerned that we will lose public support for energy transitions if the public associates higher energy prices and climate policies. We must manage the transition carefully, because we cannot afford a setback in climate progress,” he added.

According to IEF’s updated report, investment decisions need to be made today during a period of extraordinary uncertainty and change in both geopolitics and energy policy, but some proposed policies to respond to high energy prices include windfall taxes, regulations, and restrictions – all of which make investment decisions more difficult and/or less likely.