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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Are Big Oil's Best Days Behind It?

  • With the approval of the Willow oil project, the Biden Administration tacitly admitted that oil and gas would be needed for decades regardless of the pace of the energy transition.
  • Big Oil isn't rushing to invest in mega projects as they continue to stick to capital discipline and to core areas.
  • Lower-emission, low-breakeven barrels
Offshore

By approving a scaled-down project for new drilling in Alaska, even the Biden Administration tacitly admitted that oil and gas would be needed for decades regardless of the pace of the energy transition. 

However, the headline message from the U.S. Administration and EU policymakers hasn't changed—the world needs to move faster in deploying renewable energy solutions to reduce unwanted dependence on foreign fossil fuels coming from rogue regimes and to have a chance at net-zero emissions by 2050.   

Mixed Messages For The Oil Industry 

At the same time, oil companies are getting mixed messages. They are criticized for not investing in raising production when oil and gasoline prices are high, and slammed for wanting to keep and attract investors – after years of poor returns – with the excess cash they rake in.  

Big Oil isn't rushing to invest in mega projects as they continue to stick to capital discipline and to core areas from which they know they can extract relatively lower-emission barrels than in other basins at a higher profit per barrel. 

Permitting hurdles in the U.S., including in the midstream, as well as windfall taxes on energy companies' profits in Europe, are discouraging oil and gas companies from reinvesting much money into massive new developments. 

ConocoPhillips' Willow Project in Alaska, just approved by the Biden Administration, is a rare potential investment in an underdeveloped area, and could be one of the last such multi-billion projects, analysts tell Business Insider

The Willow Project is expected to produce 180,000 barrels of oil per day at its peak and potentially reduce U.S. dependence on foreign crude supplies, the company says.  

"Willow fits within the Biden Administration's priorities on environmental and social justice, facilitating the energy transition and enhancing our energy security, all while creating good union jobs and providing benefits to Alaska Native communities," said ConocoPhillips chairman and CEO Ryan Lance. 

According to Wood Mackenzie, Willow's Scope 1 and 2 emissions intensity would be lower than other Alaska projects and lower than many of the current sources of U.S. oil imports.   Related: The Age Of The U.S. As A Middle East Power Broker Is Over

Environmentalists were furious with the Administration's decision to approve the project, with Friends of the Earth's Fossil Fuels and Lands Campaigner Raena Garcia saying, "President Biden's approval of the Willow project is a colossal and reprehensible stain on his environmental legacy." 

"While the Administration sides with Big Oil and exploitation of our public lands, we will keep fighting until this project is stopped dead in its tracks."

Environmental groups are also fighting to stop proposed oil and gas developments in the UK North Sea, with the Cambo and Rosebank projects the main targets of campaigners. 

Investors Want Returns And Capital Discipline 

Apart from climate campaigners, Big Oil is under pressure to not invest in high-cost projects, according to Andrew Logan, senior director of oil and gas at Ceres, a sustainability nonprofit that works with investors. 

"For a variety of reasons, they are under a lot of pressure from investors not to do that," Logan told Insider. 

"It's not just climate concerns. In the past, every time there's a boom, companies plowed money into oil and gas projects when costs were high, and returns were poor. So there's been a push for capital discipline." 

The oil and gas industry is disciplined in spending, also because of the mixed messages from policymakers and forecasts that global oil demand will peak in less than a decade.  

The Underinvestment Time Bomb  

But peak oil demand doesn't mean the end of oil and gas. 

Fossil fuels, accounting for over 80% of the world's energy supply today, will continue to be a key part of the mix decades from now. And new investment will be needed due to the fact that existing fields are depleting and need to be replaced with new resources. 

Saudi Arabia, the world's top crude oil exporter, has been warning for years that the rush to ditch fossil fuels and the reluctance to invest in new supply would create shortages in oil and gas while the world still needs them. 

Now the top executives of the biggest international oil and gas firms, such as BP's CEO Bernard Looney and Chevron's CEO Mike Wirth, are joining Saudi Aramco in calling for an "orderly" transition in which people should get secure and affordable energy supply they currently need and they currently get from fossil fuels.  

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Low returns in the recent past and not-rosy expectations of future returns, either in absolute terms or on a risk-adjusted basis, are holding back the recovery of investments from Big Oil, Gautam Jain and Luisa Palacios, 

Senior Research Scholars at the Center on Global Energy Policy at Columbia University, wrote in an analysis this month.   

Yet investment in upstream is needed, especially in lower-emission low-breakeven oil barrels, Wood Mackenzie said in a recent report.  

"The world is far from the end of the hydrocarbon era," said Andrew Latham, Vice President, Energy Research at Wood Mackenzie. 

"Truly advantaged resources, with low breakeven (resilience to low prices) and emissions (sustainability in scope 1 and 2 terms) are anything but plentiful," Latham said. 

"As things stand, we see enough to satisfy only about half of our base-case oil and gas demand forecast to 2050."   

By Tsvetana Paraskova for Oilprice.com

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