The record high prices of the pump, the emerging shortage of diesel fuel just at the beginning of the summer season and the non-cooperating OPEC are probably the causes of many headaches among government officials around the world. But these are actually manifestations of deeper problems in the energy industry.
Insufficient investment Over the last decade, Europe and, to a lesser but no less significant extent, North America have set themselves the task of reducing their dependence on fossil fuels and increasing their dependence on renewable energy.
This stimulates the eviction of oil and gas investors and the emergence of the so-called ESG investment trend. Money for new oil and gas developments became more difficult to use as banks joined the ESG movement and companies had to cut costs.
Saudi Arabia’s oil minister has warned that underinvestment in oil and gas will boomerang earlier this year and is not the only one. Many OPEC officials issued the same warning, but to no avail. After all, none other than the International Energy Agency said last year that the world does not need new oil and gas exploration because we will not need more new oil or gas supplies.
Of course, just a few months later, the IEA changed its tune, calling on OPEC to increase production, and this demonstrates one of the harsh realities of the energy industry: you can’t reverse a process that has been going on for years.
Low levels of detection
A topic that is not talked about much, the average rate of new oil and gas discoveries is somehow comparable to the average conversion rate of solar panels: it is well below 30 percent.
Bloomberg recently reported that three wells that Shell drilled in the Brazilian sea have dried up. The supermayor had paid $ 1 billion for drilling rights in the area and had spent three years drilling to come out empty-handed. Exxon also failed to use significant oil reserves in its Brazilian units, which cost it $ 1.6 billion.
The news highlights the risky nature of oil and gas exploration even in places like Brazil, which has been touted as the industry’s next hotspot, possibly alongside Guyana. Brazil has become a magnet for supermajors because of its fertile pre-salt zone, but, as a local energy consultant told Bloomberg, great discoveries have already been made – when the discovery rate was close to 100 percent.
However, the average success rate for the oil and gas industry is much lower than 24.8 percent, according to Bloomberg. And fewer and fewer great discoveries need to be made.
Inflation of production costs
Wider inflation trends, largely driven by rising energy costs, have not gone unnoticed by the energy industry itself. In the shale spot in the United States, production costs have risen by about 20 percent. Two companies recently warned that they will report higher costs for their second quarter, Continental Resources and Hess Corp., and they are far from the only ones experiencing these higher costs.
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The shortage of raw materials such as fractional sand and steel well pipelines earlier this year is one of the reasons for the increase in production costs not only in the shale patch, but also wherever these raw materials are used in oil fields. Labor shortages are also a particular problem for shale in the United States, which is helping to increase production costs. The ongoing problems with the supply chain from the pandemic are also combined.
The bigger problem is that the industry does not expect any recess in the coming months, as Argus recently reported, citing oil and gas executives. The reduction in production costs comes at a time when the federal government really needs more oil and gas, which is probably the worst possible moment, as it further discourages drilling to spend more on new drilling.
Cyberattacks
Cybersecurity has become a source of concern in the energy industry in recent years as cyber attacks have multiplied significantly. The Colonial Pipeline hack did help with the cybersecurity front, but little action seems to have followed.
A brand new study by DNV, a Norwegian consulting company for risk assessment and quality assurance, revealed this week that the industry is quite uneasy about cyber threats and, worse, is not really prepared to deal with them.
According to the survey, 84 percent of executives expect cyberattacks to cause physical damage to energy assets, while more than half – 54 percent – expect cyberattacks to lead to loss of life. About 74 percent of respondents expect damage to the environment as a result of the cyber attack. And only 30 percent know what to do if their company becomes the target of such an attack.
geopolitics
The most chronic risk in the energy industry, geopolitics, is never far off when prices begin to fluctuate sharply or, as at present, remain persistently high. The prospect of an EU oil embargo on Russia, although declining in the last few days, is a major upward factor in oil prices. The lack of progress in nuclear talks with Iran is another. And then there is, of course, the apparent reluctance of OPEC to respond to Western calls for more oil.
Russia itself does not seem at all worried about the prospects for an embargo. “The same oil they did [the EU countries] purchased from us will have to be purchased elsewhere, and they will pay more because prices will definitely rise; and as delivery and transportation costs increase, it will be necessary to invest in building the relevant infrastructure, “Deputy Prime Minister Alexander Novak said this week.
Iran, meanwhile, is increasing its oil exports, which go almost exclusively to China. The country has signaled that it will not agree to a deal with the United States unless the United States complies with its demands, and it seems that the ball is now in Washington’s court. China, meanwhile, will have Iranian oil, but no one else.
For the United States, the price problem has become so serious that President Biden is now seeking a meeting with Saudi Crown Prince Mohammed, with whom he has consistently refused to associate, instead with his father, King Salman. Biden also openly criticized MbS for its alleged role in the assassination of a Saudi dissident journalist, calling the Kingdom a “pariah” without “redemptive social value.” Geopolitics can be awkward.
By Irina Slav for Oilprice.com
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