Pump jacks are seen in the Midway Sunset oilfield, California.
Lucy Nicholson | Reuters
Chronic underinvestment in the hydrocarbons sector will keep global supply tight, the head of the world’s biggest oil company has warned, suggesting a future rise in energy prices as China reopens and returns of the aeronautical industry are accelerating.
Asked by CNBC’s Dan Murphy about the current state of the oil market, Saudi Aramco CEO Amin Nasser said: “Persistent underinvestment in oil upstream and even downstream is still there. The latest report from the IEA speaks of a demand of 101.7 million barrels – rising from 100 million barrels in 2022 to almost 2 million barrels more with the opening of China and the aeronautical industry”, which does not has not yet returned to pre-Covid levels.
“There is a lot of growth potential in aviation,” Nasser said. “And with China opening up and the lack of investment, there is certainly a medium to long-term concern to make sure there are adequate supplies in the market.”
International reference Crude Brent was trading at $84.43 a barrel on Friday afternoon in London, roughly flat year-to-date and around 5% lower than a year ago.
Larger-than-expected US fuel inventories in recent months and expectations of weaker global growth have contributed to lower energy prices. But as drilling activity slows in response, that drop in production will threaten supplies going forward, Nasser said.
According to oil services company Baker Hughes, the number of active rigs in the United States fell from a recent high of 627 in early December to 600 in late February. The number of rigs in service at the end of February is at its lowest since early July 2022, the company reported.
“I think it’s very difficult – if you look at spending in the sector, it’s about $370 billion to $400 billion, currently upstream, compared to about $700 billion in 2014,” Nasser said of the impact of the potential windfall. taxes, climate change policies and efforts to decarbonize investments in the oil sector.
Policymakers in a number of countries are calling for windfall taxes on big oil and gas companies, many of which have seen record profits last year as supply shocks and years of underinvestment in the sector pushed prices to multi-year highs.
The debate around the oil industry has been dominated by tensions between the desire for cleaner energy sources to combat climate change and the need for energy security.
According to the United Nations Intergovernmental Panel on Climate Change, approximately 90% of global CO2 emissions come from fossil fuels and heavy industry. But demand for fossil fuels remains high, as an abundant energy supply and a balanced oil market are crucial for economic growth, moderating inflation and national security.
For Nasser, these are still under threat due to the decline in investment in oil production.
“There is definitely a strong underinvestment. Maturity [means that] moreover, over time you need more investment,” the CEO said, referring to the fact that as oil fields mature and deplete, drilling costs increase.
More production investment is needed to manage the rate of decline of oilfields around the world, which have an average decline rate of around 6%, Nasser said. That means that in a system that’s supposed to produce 100 million barrels a year, “you need 6 million barrels just to make up for the decline,” he explained.
“There is therefore a need for investment. And policymakers, regulators and investors need to ensure that there is enough investment available in the sector,” he said. “Otherwise, it will have an impact on the supply in the medium and long term.”