Underinvestment in the oil and gas sector has extended for a second year in 2021, increasing the prospects of price shocks, scarcity and energy poverty, a report by the International Energy Forum (IEF) and IHS Markit has claimed.

Global upstream investment in the hydrocarbon sector remained depressed this year at $341 billion, 23% below the pre-pandemic annual level of $525 billion, despite rising global demand, the report said.

The report was jointly released by the two companies on Tuesday at the 23rd World Petroleum Congress in Houston.

Upstream capex had slumped by 30% last year, as the coronavirus pandemic led to sustained economic downturns in several world economies.

The report argued that global oil and gas demand has rebounded to near 2019 levels and is poised to keep increasing for several years, which warrants higher investment in the sector.

“Oil and gas investment will need to return to pre-Covid levels and stay there through 2030 to restore market balance,” the report noted.

Joseph McMonigle, Secretary General of the IEF, said the “energy crisis in Europe and Asia this winter is a preview of what we can expect in the years ahead".

“Two years in a row of large and abrupt underinvestment in oil and gas development is a recipe for higher prices and volatility later this decade," he said.

McMonigle warned that “more frequent boom-bust cycles will harm consumers and producers recovering from Covid, set back UN climate and sustainable development goals, and threaten global security".

Potential energy crisis

Daniel Yergin, Vice Chairman of IHS Markit said that as energy transition proceeds, “underinvesting in oil and gas before renewables and other low-carbon technologies that are ready to scale up to meet energy demand could create recurrent energy crises of the kind we saw in Asia and Europe over the last few months".

Yergin cautioned of elevated commodity prices and adverse economic consequences if the low investments in the upstream sector continue over a longer time.

The report said that several factors are leading to lower investments in the upstream sector.

“These include record price volatility, changing government regulations, divergent long-term demand scenarios, and non-standardised ESG criteria,” it noted.

Pressure on governments and industry for a green recovery is further constraining the availability of capital, it added.

“As a result, investment decisions are becoming increasingly complex,” the report argued.

Uncertain investments

The unprecedented level of uncertainty around investments increases the risk profile of hydrocarbon investments and the cost of capital, thereby reshaping investment decisions, the report stated.

The two think tanks believe that the “next two years will be critical for sanctioning and allocating capital toward new projects to ensure adequate oil and gas supply comes online within the next five to six years".

Insufficient upstream investment could result in more price volatility and spur adverse economic consequences — such as wider energy poverty, more frequent scarcity and fuel switching to more polluting energy sources such as wood and coal, the report added.

Call for higher upstream investments

Leading national companies in the Middle East have also been presenting a strong case for higher upstream investments.

Sultan Ahmed Al Jaber, Chief Executive of Abu Dhabi National Oil Company (Adnoc), said at the recent Adipec conference in Abu Dhabi that massive investments in the global oil and gas sector are needed to keep pace with increasing energy demand.

Al Jaber said, “the oil and gas industry will have to invest over $600 billion every year until 2030, just to keep up with expected [global] demand".

IEA calls for a halt to upstream investments

However, as a stark contrast, the International Energy Agency (IEA) earlier this year warned that no new oil and gas fields should be approved for development if the world is to meet its climate goals and limit global warming.

In its report, the IEA claimed that even if current climate pledges by global governments are achieved, the world will still fall short of bringing energy-related carbon dioxide emissions to net zero by 2050

The IEA report also called for a halt to sales of new internal combustion engine passenger cars by 2035 and the phasing out of all unabated coal and oil power plants by 2040.