The global oil and gas industry may be reaching a critical point for new development — and may not have the capital to keep pace with demand.
During discussions at CERAWeek by IHS Markit on March 5, officials from around the world identified a need for more money to be pumped into oil and gas to keep pace with an anticipated demand surge that could be as strong as any in a decade.
"Demand has not been this solid and positive for a while, probably since before the last global financial crisis," OPEC Secretary General Mohammad Barkindo said. "The global industry needs to pay attention to this potential threat."
The industry, and American producers in particular, have significantly cut back their spending over the last several years. The reductions were a result of companies trying to survive a price war sparked by OPEC in an effort to crush American shale oil producers.
"The effect of that low price environment was less investment," said John Hess, the CEO of Hess Corp. Hess noted that IEA estimates call for an average of $540 billion a year to be invested in infrastructure to keep pace; in 2016, the investment totaled $380 billion, which has increased by a total of $40 billion over the last two years. "We're not investing enough and the three years of underinvestment will be seen in the next several years."
A rapid buildup may not be on the horizon, either, as American producers now find themselves being asked to return cash to shareholders. "We've gone from 'Drill, baby drill' last year to 'Show me the money,'" Hess said. "The focus … has gone to financial returns." Hess itself is trying to fend off an activist investor that has not been satisfied with the company's recent track record and has called for the CEO to step down.
Even if the industry does place a focus on development, it may find capital markets hesitant to help out. Samir Assaf, the chief executive for Global Banking & Markets for HSBC Holdings PLC, said lenders were being "extremely" cautious when working with the oil and gas industry. "The environment is changing around us," he said.
Lenders are under increasing pressure from both analysts and investors to limit investment in the industry. Money that would have gone to the oil and gas sector, he said, could go to renewable energy sources. By 2025, he said, HSBC intends to spend $100 billion on renewables.
"There are investors … who are looking at us and saying, 'are you sure that this is being committed to the right place in the industry?'" he said. "Our investors … are looking at what we may have in the future. The banking industry will be more constrained in the future … than the community is anticipating."
