How Putin Revived Energy Security

As it does every year, CERAWeek 2023’s agenda featured a wide variety of topics and key themes. The most recent conferences have been dominated by discussions about climate change and the need for carbon reduction, topics that certainly remained a point of emphasis this week in Houston. The agenda also featured a great deal of discussion about LNG, carbon capture, permitting and the future supply picture for both crude oil and natural gas.

But perhaps the most striking aspect of this year’s conference was the return of the topic of energy security as a top of mind priority. The obvious main driver of this resurrection stems from Russia’s war on Ukraine, and the energy displacement and crisis it has exacerbated across the European continent.

The object lesson provided by Germany especially, along with some other nations of Europe, is that surrendering a country’s energy security to an over-reliance on a single source is dangerous, especially when that single source is a historical adversary. It’s a lesson other countries have taken to heart over the last 13 months, and it has led to record-setting demand levels for every fossil fuel: Oil, natural gas and even coal.

This trend has become especially pronounced among developing nations like Pakistan, who have found themselves strapped for affordable energy supplies as LNG cargoes formerly bound for Asia gobbled up by Europe’s suddenly voracious appetite. These developing countries, in need of affordable and abundant energy to drive their economies, are increasingly turning to coal. At the same time, demand for crude oil continues to rise rapidly in the developing world as manufacture and availability of electric vehicles lags due to supply chain inadequacies, lack of needed infrastructure, and difficulty sourcing critical energy minerals that go into their batteries.

This nod to reality is also bubbling up in the Biden administration. As I noted here Wednesday, Energy Secretary Jennifer Granholm, a long-time critic of oil and gas companies, offered them praise in her speech at the conference and acknowledged that we will still be using oil and gas decades from now.

These concerns also led to far more discussion than in recent years about the need for increased investment in the finding and producing of additional oil and gas resources. With estimates of global demand for 2023 and out years continuing to go higher, there is rising concern inside and outside the industry about where the supplies are going to come from.

The Wall Street Journal reported that, in private conversations at the conference, some oil executives expressed concerns that U.S. shale production is beginning to stagnate as the prime prospects in the various basins are drilled up and operators are forced to focus on secondary targets. Warning that OPEC was moving back into the driver’s seat where global oil supplies are concerned, ConocoPhillipsCOP
CEO Ryan Lance told the CERAWeek delegates that “The world is going back to a world that we had in the ’70s and the ’80s.”

Those who, like me, lived through those years will remember them as a time when U.S. energy security was on the wane. Domestic oil production was far from adequate, the country was heavily reliant on imports from the Middle East, and consumers suffered through a series of oil shocks, gasoline price spikes and even periods of rationing as OPEC flexed its supply dominance muscle.

With energy intelligence and analysis companies like Rystad Energy and Wood MacKenzie reporting that under-investment in finding new reserves over the last decade now exceeds half a trillion dollars, oil and gas executives at the conference were understandably focused on the need to increase investment. This re-focus on the core business of finding and producing oil and gas was also a point of emphasis by the big integrated oil companies – including BP and Shell – in their recent earnings presentations.

One engineering firm CEO I spoke with Thursday warned that these executives need to avoid the thought that they can just go back to a “business as usual” posture, and that carbon reduction priorities no longer matter. That point is well-taken, and it seems certain we will see these companies continue to build out their carbon reduction plans even as they raise their levels of investments in new production.

Bottom Line: The direction of energy policy in the western world is clear and unambiguous. To remain viable and sustainable into the future, oil and gas companies must invest in projects and technologies that enable them to dramatically reduce their carbon footprints.

At the same time, though, there is no question that Russia’s war on Ukraine has elevated energy security concerns in almost every nation around the world. It won’t be a return to “business as usual,” but there will be an increased focus on new investments in “old” energy resources in the years to come, mainly because heightened concerns over energy security demand it.