The global oil market is seeing one of its worst periods on record on account of years of underinvestment in the oil sector helping to explain the current market tightness and razor-thin spare capacity margins, Muhammed Barkindo, OPEC secretary-general has said.
Speaking at the 2022 edition of the Nigerian Oil and Gas Conference (NOG) on Tuesday in Abuja, said the oil industry is now facing huge challenges along multiple fronts, and these threaten its investment potential now and in the longer term.
“To put it bluntly the oil and gas industry is under siege,” said Barkindo.
In OPEC’s 62-year history, spare capacity has never been as low as it is today, and this takes into account periods of war, natural disasters,s, and other market shocks. If this trend continues, it could haunt us in the future, he said.
The outgoing OPEC boss said the evolving geopolitical developments in Eastern Europe, the ongoing war in Ukraine, the ongoing COVID-19 pandemic, and inflationary pressures across the globe have come together in a perfect storm that is causing significant volatility and uncertainty in the commodity markets, more importantly, in the world of energy.
“Against this backdrop, a number of industrialized countries and multilateral institutions continue to pursue stringent policies aimed at accelerating the energy transition and fundamentally altering the energy mix.
Aside from these issues, Barkindo said that the oil industry is still reeling from the enormous investment losses of recent years.
“In a very short timespan, the industry has been hit by two major cycles – the severe market downturn in 2015 and 2016, and the even more far-reaching impact of the COVID-19 pandemic.
In 2020, the first year of the pandemic upstream oil capital expenditure fell by around 30 percent. This exceeded the colossal 26 percent annual declines experienced during the severe industry downturn in 2015 and 2016, he said.
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OPEC’s most recent World Oil Outlook shows the global oil sector will need cumulative investments of $11.8 trillion in the upstream, midstream, and downstream through to 2045 to meet expectations for significant growth in energy demand.
However, the world still needs energy. OPEC projects that total primary energy demand will expand by a robust 28 percent in the period to 2045.
Oil is expected to retain the largest share of the energy mix, accounting for just over a 28 percent share in 2045, followed by gas at around 24 percent.
“In other words, oil and gas together will continue to supply more than half of the world’s energy needs for many decades. These hydrocarbons are especially vital to the energy mix in regions like Africa, which will see massive population shifts and economic growth in the coming years. These developments increase the urgency of eradicating energy poverty,” Barkindo said.
To reverse the trend of under-investments, Barkindo called for NOCs to continue to innovate and flourish. “It is of utmost importance that they have predictable and unfettered access to investment capital.
He said “It is essential if we are to develop new technologies, strengthen our human capacity, and remain leaders in innovation so that we can do our part to meet the world’s growing need for energy, shrink our overall environmental footprint, and expand access to underserved communities.
In the short term, the OPEC boss said the market can see temporary relief if it is able to unlock resources and strengthen capacity if the oil produced by the Islamic Republic of Iran and Venezuela were allowed to return to the market.
“As we know, their oil industries have been held hostage by geopolitics, while Libya has faced internal challenges that have at times sharply curbed its exports.
“Unfortunately, the disruptions affecting these three OPEC Member Countries not only contribute to the current market tightness, they directly affect the welfare and development of these great nations,” he said.
He noted that it takes time to return to normal operations and restore production capacity. This is especially the case in countries that have had to endure restrictions on investment and exports, and following severe market shocks like as seen in 2020.
“As we all know, you cannot turn a tap and solve the world’s oil needs overnight; it takes time, technology, logistics, and capital,” he said.
But even this is being hampered by the penchant to criticise the upstream sector but this discounts the current capacity challenges that also plague the downstream, especially with regard to transportation fuels.
He noted that refinery closures in recent years – coupled with a number of untimely accidents at important regional refineries – have curtailed supplies and helped fuel the energy market volatility of recent months.
Barkindo condemned frequent attacks on oil producers on account of climate concerns noting that such remarks jeopardize efforts to achieve universal, reliable, and affordable energy access for people across the globe, including those in developing countries, such as Africa.
