Mar 2, 2023 - Energy & Environment

Solving oil's Goldilocks problem

Illustration of a spoon in an oil barrel.

Illustration: Shoshana Gordon/Axios

A mystery facing C-suite execs and policymakers is how much oil and gas the world needs in the future — and therefore how much should be spent now to ensure enough flows.

Why it matters: Call it the Goldilocks problem: Too little investment could bring a pricey and ugly supply crunch — one that even slows energy transition.

  • Too much means stranded assets, infrastructure that locks in emissions, or both.

Driving the news: Enter new analysis from researchers with Columbia University's energy think tank that offers ideas on guiding investments without bailing on climate goals.

  • Right now, "the oil and gas industry is investing less than what is required to meet current demand trends but more than what is needed in the net-zero scenario," write Gautam Jain and Luisa Palacios with Columbia's Center on Global Energy Policy.
  • Current investments are "consistent with announced climate pledges by countries, indicating that companies are rationally adjusting to the progression of policy developments."

The big picture: Right now, producers are focusing on big returns (last year smashed records), paying down debt, and rewarding investors.

  • But relatively sluggish capital investment also reflects "adjustments to policy signaling about phasing down oil and gas production."
  • The "void" in private companies' investments is being filled by state-owned companies, especially in the Mideast, which "adds geopolitical risk to future supply."
  • Financial industry ESG initiatives are not a barrier to financing now, but they could be in the future, they write.

What we're watching: The paper offers a "toolkit" for managing existing assets and investing in "transition assets" — projects that help "meet energy security and geopolitical priorities within the confines of climate goals."

A few examples...

  • For banks, "a big focus of future financing could be conditional on unequivocal progress on flaring and venting of natural gas" to cut methane emissions. Multilateral development banks can focus on this in countries with state-owned oil giants.
  • The financial sector should focus on "transition ready" projects — think carbon capture, controls on flaring, "hydrogen-ready" infrastructure, and plans for retirement or retrofitting.
  • For policymakers, options include fast-tracking permits for transition-ready infrastructure; as well as ways to focus on decommissioning assets rather than having companies divest to actors with less stringent climate goals.

Zoom in: Oil and gas companies with a market cap over $500 million made more than $300 billion in capital investments in 2022.

  • That’s a jump from 2021, but far below levels in the mid-2010s.

Of note: Keep in mind that companies aren't just bobbing along in the policy and demand currents — they're actors that help shape these things.

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