Investment into new oil and gas production has collapsed this year, which could lead to an energy crisis with the global economy set to suffer as a result, the Secretary General of the International Energy Forum (IEF) Joseph McMonigle told Al Arabiya.
Oil and gas supermajors and national oil companies have dramatically slashed their budgets for new infrastructure investment as a result of an unprecedented demand drop for petroleum products in 2020 due to the coronavirus pandemic.
“I am concerned about the implications of a lack of investment, because if we're not investing in supply, decline rates in current existing wells could create some deficits in the future, and that will lead to higher prices. That's not good for the global economy,” McMonigle said.
Earlier this year the Organization of Petroleum Exporting Countries (OPEC) and its partners, forming the OPEC+ group, sealed a historic output cut deal in a bid to support oil prices as demand collapsed while governments issued stay-at-home orders and lockdowns to combat the coronavirus pandemic. The deal cut 9.7 million barrels per day, or around 10 percent of global supply, from markets.
However, as low oil prices struck oil firms’ bottom lines hard, many responded by cutting capital expenditure (CAPEX) investments planned for 2020, meaning that a future shortage in oil production may be possible. In this case, oil prices may rise suddenly as demand returns but output does not grow.
“I don't think it's good for even producers who the narrative may seem good for, I think producers, especially in OPEC, I think, have realized that a healthy global economy is good for their bottom lines,” McMonigle said.
“I am concerned about the lack of investment in all sectors and I'm worried about what 2021 might bring, because a lot of these decisions are made at the beginning of the year and I don't think we'll have much clarity in terms of demand in early 2021. So we could see some of these CAPEX decisions continue into 2021 and I think that will be probably in a full blown crisis, even if investment returns to normal levels in 2022,” he added.
“Extraordinarily lucky” to have Saudi Arabian leadership
Earlier this week Saudi Energy Minister Prince Abdulaziz said no-one should doubt OPEC’s commitment to propping up volatile markets, nor doubt the ability of the group to be flexible to changing global circumstances.
Saudi Arabia is also chair of the G20 this year, and has led global efforts to fight the coronavirus pandemic. The twin leadership roles that the Kingdom has played in energy have been extremely beneficial this year for markets and the world, McMonigle explained.
“I think we were extraordinarily lucky that Saudi Arabia was both the leader of OPEC+ and actually led the really massive cuts in production that stabilized oil markets, and at the same time was president of the G20 and could convene the extraordinary meeting of G20 energy ministers to discuss additional measures and market driven measures to stabilize the market,” he said.
McMonigle noted that Prince Abdulaziz had forewarned of the critical problem that COVID-19 was going to cause energy markets and the world in February before the virus had become a serious threat to most of the world. Indeed, in April prices for US West Texas Intermediate (WTI) oil plunged below zero, a first for the benchmark, leaving producers paying buyers to take spare crude of their hands.
“Had we listened to him back in February, we probably could have prevented I think the negative pricing that we saw later in the spring,” he said.