High oil prices have failed to bring about a significant increase in investment, raising the risk of a hugely undersupplied oil market this decade, according to Christyan Malek, JP Morgan's Global Head of Energy Strategy.
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JP Morgan's research shows a $400 billion oil underspend to 2030 and paints a grim picture in which all energy investment -- in both fossil and non-fossil fuels -- needs to grow at a faster rate than the prevailing investment implies.
The threat of a large investment shortfall has loomed large over the industry for some time, but the fact that higher oil prices and growing energy security concerns haven't translated into a strong recovery in spending should cause alarm bells to ring even louder.
"In contrast with renewables, the oil industry is comparatively starved of capital but with an abundance of projects and potential supply to be tapped into," Malek told S&P Global Commodity Insights in an interview.
Malek said at the same time fossil fuels are certain to play a role in the longer-term energy mix, due to the fact that oil is largely non-fungible with other energy sources to 2030, such as in transportation and chemicals.
"So oil is really where we see the greatest need for incremental investment, both in sustaining the existing production base, as well as growing it, as we see 2030 demand 7.1 million b/d above 2019 levels, with current spending levels implying a 700,000 b/d average gap to 2030," he said.
While oil prices have moved structurally higher over the past year, with average Brent prices up more than 40% in 2022, Malek said there has been very little change in upstream growth ambitions, with nearly all companies that provide medium-term spending outlooks sticking closely to the ranges laid out over the past few years.
"Oil capex is up, but not enough," said Malek. So while JP Morgan's commodities team estimates upstream spend growing 13% this year, the highest growth rate in a decade, Malek said this comes from a very low starting point, and investment remains more than 45% below the 2014 peak.
Malek pointed out that the relationship between price and capex has broken down materially.
"Outside of the national oil companies, most other companies would need to raise spending 30%-40% to get back on trend... Instead, within the total spending envelope the commitments to low carbon and renewable energies are growing significantly faster and this is adding further pressure to upstream budgets," Malek said.
Analysis by S&P Global lends some weight to Malek's view that spending has not spiked in line with price as in previous ,years even if there has been some upturn in investment. This year to date, nine non-OPEC major oil projects have been sanctioned and S&P Global expects the annual number to reach 16 projects, which would match last year's total.
Malek said there is now some recognition that investing in fossil fuels is critical for maintaining energy security. However, he added that "while we are seeing recognition of the need for investment into oil and gas, it hasn't translated yet into actual additional spending."
Malek warned that supply looks more challenged than ever, with US shale production growth limited by supply-chain restrictions and OPEC+ capacity constraints and production quota misses.
JP Morgan's commodities research suggests oil could still average around $80/b next year in a recessionary environment, but if OPEC+ falls short, shale growth continues to slow, and demand keeps rising, prices could spike toward $150/b in 2023. Many OPEC+ producers have been struggling to meet their quotas given sanctions and capacity constraints, with only Saudi Arabia and UAE the having an adequate amount of leverage, while US producers continue to spend with caution as US output grows but remains well short of its 13 million b/d peak in 2020.
The International Energy Agency provided a similar warning in its October monthly report. "While previous large spikes in oil prices have spurred a strong investment response leading to greater supply from non-OPEC producers, this time may be different," the Paris-based energy watchdog said.
"US shale producers, traditionally the most responsive to changing market conditions, are struggling with supply chain constraints and cost inflation -- and, so far, they are maintaining capital discipline... This casts doubt on suggestions that higher prices will necessarily balance the market through additional supply," the IEA said.
Malek said the recent decision by OPEC+ to cut a headline 2 million b/d in production is a sign that the group is willing to defend $80/b, underpins a floor on prices and offsets the recent downward momentum, which has seen Dated Brent drop from close to $140/b in March to below $90/b in October.
"This price stability is needed for investment to be realized," Malek said, adding that the role of OPEC "is not just meeting demand today, but incentivizing the market to invest in enough supply to meet demand in the future too." It is a message that OPEC has tried to communicate on a regular basis, but consumer nations having to pay higher prices have not always been in agreement.