KAPSARC Warns of Challenges Hindering Investments in Oil, Gas

Industry investment should increase during the next two years, otherwise, the world risks a significant deficit of oil and gas supply by 2025 and beyond, found a report by the King Abdullah Petroleum Studies and Research Center (KAPSARC).

It also warned of a high probability of the price of oil increasing to over 100$ per barrel for a prolonged period.

The report, “Investment Challenges Affecting the Oil and Gas Industry,” revealed that investment rates and oil and gas capital expenditure (capex) dropped 30 percent in 2020 due to the pandemic.

These oil and gas price downfalls reduced the industry’s investment attractiveness, resulting in global upstream oil and gas investment cuts of around 43 percent between 2014 and 2016.

The report noted that the OPEC+ interventions helped market predictability, thus assuring many investors.

Using Rystad UCube, KAPSARC’s internal analysis shows the difference between global oil production under the required upstream capex to satisfy demand versus a situation with no upstream capex investment. Each case is analyzed under three different price scenarios.

The results showed a significant drop in oil production if the industry did not get the necessary investment.

In the short term, price volatility is the most critical investment challenge in the oil and gas market.

“However, there are other factors to consider in the long term, such as the 2040 outlook projections or the actions of environmental defenders that tarnish the reputation of the oil and gas industry, combined with new ESG practices that are not standardized. The latter also affects the sector’s attractiveness for potential financiers,” read the report.

Several factors have limited the three elements that determined the ability of OPEC+ to bring stability to the market and ease investors’ decisions for long-term investments.

They include non-OPEC producers’ behavior, such as shale producers producing without limits, COVID-19, and the geopolitical agenda against using fossil fuels.

Researchers Julio Arboleda and Hamid al-Sadoon highlighted four key challenges facing the oil and gas industry that generate concerns among policymakers and investors regarding the industry’s investment attractiveness.

The challenges are price volatility, uncertainties due to significantly diverging long-term forecasts, increasing climate change concerns, and the lack of regulation on environmental, social, and governance (ESG).

The report pointed to another problem facing the oil and gas industry: attracting and retaining human cadres.

A survey prepared by the Red Sea Development Company showed that young Saudis are more interested in careers related to technology or tourism than traditional industries, such as oil and gas or petrochemicals. These traditional industries have fallen to the bottom of young Saudis’ career preferences.

KAPSARC is an advisory think tank within global energy economics and sustainability providing advisory services to entities and authorities in the Saudi energy sector to advance Saudi Arabia’s energy sector and inform international policies through evidence-based advice and applied research.

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