julio 20 2022

Lexology Getting the Deal Through: Developments in oil and gas markets

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At the end of 2019, the Brent crude oil price was around US$65/bbl. The key issues prevalent in the sector were energy transition, a continuing growth in global demand for energy and how the energy sector as a whole was going to respond to those competing pressures.

In the 30 months since then, there have been two unlinked global events that have resulted in a paradigm shift in the global oil and gas sector. The Covid-19 pandemic altered the demand and supply equation and caused oil and gas companies to review investments and strategies. Coupled with an oversupply caused when the OPEC+ countries decided not to cut back on supply in March 2020, the falling demand caused by Covid lockdowns around the world sent the oil price into freefall, with the Brent crude price bottoming out at US$20/bbl in April 2020. Since then, there has been a gradual recovery of the oil price and investment in the sector.

By February 2022, crude had recovered to around US$90/bbl and that looked to be something of a new norm. The Russian invasion of Ukraine and the resulting economic sanctions created a supply crunch, temporarily forcing up the price of crude to US$140/bbl, which then levelled out by May 2022 to around US$110/bbl.

These price rises clearly affect consumers and businesses, who have to pay more for their energy, and have led to a growth in inflation. They have also impacted corporate strategy. At the new higher oil prices many oil and gas prospects that had previously looked uneconomic will be unlocked, while at the same time increased investment in renewable energy now looks much more attractive.

Not only is there now a general upward slope in the global energy demand curve, with increases in demand particularly in Asia and Africa going past 2050, there is now, at least temporarily, a constriction of supply with Russian oil and gas being taken out of the global market. These competing forces will keep oil and gas prices high for some time.

Security of supply has become a key factor in national energy policies and it is likely that one of the results will be an increase in global LNG production and export to countries previously reliant on Russian oil & gas.

However, in spite of a huge demand for energy, it is clear that energy transition – the move away from hydrocarbon-sourced energy – has a momentum that is not being slowed: indeed, Russia’s actions in Europe have only reinforced the need for renewable and alternative sources of supply. All stakeholders – from investors to consumers – have embraced the need for energy transition and continued investment in non-hydrocarbon sources of energy.

Nevertheless, for every international oil company that sells off oil and gas assets, there is a buyer to step in. Some companies do not have the financial muscle to shift quickly from one type of business to another – and the buy-side has been filled to a large extent by private equity-backed companies and national oil companies. Stakeholder pressure and improved corporate governance has led to most, if not all, of those companies that are committed to continued investment in oil and gas to embrace low-carbon initiatives and, more generally, environmental, social, and governance issues.

Energy transition and increasing global demand for energy, now coupled with concerns about security of supply caused by Russia’s actions in Ukraine, will dominate strategy and policy-making for the foreseeable future. Most regulators around the world are committing to energy transition, however, it is clear that oil and gas will continue to play an important role in the energy mix for some time.

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