Key takeaways:
- OPEC Secretary General Mohammed Barkindo noted that a lack of investment in the oil & gas sector could lead to an energy crisis.
- The Secretary General estimates that the pandemic has led to a 30% contraction in investment in the sector, following a circa 50% contraction in the 2015–2016 time frame.
- Amid this backdrop, RBC Capital Markets recently raised its crude oil price outlook.
- Meanwhile, energy producers are signaling nascent inflationary cost pressures at this juncture.
- With net-zero ambitions and ESG mandates spurring activity, there is a significant investment opportunity in renewable energy.
- However, increasing competition, higher project costs and potential interest rate changes are all potential headwinds for the renewables sector.
In the last few years, particularly through the pandemic, companies, governments and traditional energy producers have been committing to ambitious carbon-reduction initiatives and net-zero ambitions. At the same time, ESG mandates from various stakeholders—employees, investors, customers and citizens—have limited investment in traditional energy production, while creating significant opportunity for renewables such as wind, solar and others. The Energy Transition will be measured in decades—and will not be a smooth one—with challenges as well as opportunities for both traditional and renewable energy producers.
Oil and gas remains a key fixture of the global energy mix
The opening keynote of the conference was delivered by OPEC Secretary General Mohammed Barkindo, who warned investors continuing to limit investment in traditional oil and gas could set the stage for an energy crisis. He further commented that available renewable energy sources combined cannot substitute the over 50% expected contribution of oil & gas to the energy mix up to 2045.
Limited investment has been a feature of the oil & gas sector throughout the pandemic, with growing ESG considerations curtailing traditional energy companies’ access to capital. The Secretary General estimates that the pandemic has caused a 30% contraction in capital invested in the sector, which comes hard on the heels of an almost 50% contraction during 2015–16. He added that while OPEC nations recognize the importance of the climate risk—with almost all members having signed up for the Paris Agreement—there are other factors to consider relating to under-investment in oil & gas.
He warned that energy poverty is the other side of the coin to climate change, with 600 million people in Africa lacking access to electricity and 900 million people without access to clean fuels. Any solutions for the energy transition need to work not just for developed nations, but for emerging countries too, he added.
Bullish crude oil outlook
OPEC currently projects crude oil demand to rise by about 6 mb/d in 2021, with global stocks reaching equilibrium between June and July. RBC Capital Markets’ Commodities Strategist Mike Tran believes the market is in the early innings of a strong cycle. He forecasts WTI and Brent will average $74/bbl and $76.50/bbl, respectively, through the second half of this year, with intermittent sprints testing the $80/bbl mark potentially in the cards. He recently raised RBC’s 2022 outlook for WTI and Brent to $72.30/bbl and $75/bbl, respectively.
The potential effects of inflationary pressure
In our meetings with oil & gas producers, the focus remains on debt reduction, capital discipline and shareholder returns, with limited appetite for production growth. Oilfield service cost inflation appears nascent at this juncture, although steel and chemicals have seen upward pressure. US energy producers in particular are focused on maintenance activity levels for the time being, despite a robust commodity price environment. Most companies continue to see the benefits of consolidation aimed at industrial scale and cost-of-capital advantages.
Opportunity for greener resources remains sizeable
Companies and key opinion leaders at the conference believe the investment opportunity in greener power sources remains sizeable. But there are also headwinds in the sector. Competition is increasing, putting downward pressure on expected returns. Attractive returns are still available in many geographies, but corporates are likely to start being more selective in choosing projects if competition continues to rise.
In this climate, major oil & gas producers are also pivoting towards renewable energy, further increasing competition. But many developers view this change positively, seeing an opportunity to partner on large development projects that will help traditional energy companies decarbonize their production base.
Potential interest rate changes was also a recurring theme. Any rise in interest rates will make projects more expensive to finance.
