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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Oil And Gas In For Turbulent Year As Governments And Industry Butt Heads

  • Government intervention in energy markets is set to add another layer of uncertainty in oil markets. 
  • WoodMac: the clash of priorities between governments and the industry is becoming more visible.
  • Another challenge related to this is getting oil and gas companies to actually increase production in order to enhance energy security.
Drilling rig

Windfall taxes, price caps, and calls for more oil and gas production marked 2022 in oil and gas. It looks like we’re in for a lot more of the same this year, especially with Western governments doubling down on their emission-reduction ambitions.

The record profits that oil and gas majors raked in last year thanks to the price rally in energy commodities prompted governments in the EU and the UK to impose windfall taxes. These were aimed at propping up state finances at a time when economies were struggling to keep going amid soaring energy prices. Yet they also led to warnings from the industry that investment decisions will be affected, and not in a positive way.

European governments, along with their counterparts in the UK and the United States, found themselves in a position where, on the one hand, they had to motivate more oil and gas production but, on the other, had to uphold their commitments to the energy transition.

According to a new report by Wood Mac, this clash of priorities will make for a complicated year in oil and gas in 2023. For starters, the authors noted, some oil and gas companies are already cutting their spending plans because of the windfall taxes. It makes sense for them to do this because governments have given no indication these will be canceled if oil and gas prices fall, which they already have.

Another challenge related to this is getting oil and gas companies to actually increase production in order to enhance energy security. If the U.S. example is anything to go by, oil and gas companies will likely resist calls for reinvestment of profits into more production. The Biden administration has repeatedly called on oil and gas producers to pump more, regardless of the administration’s decarbonization plans, but the industry has not responded favorably.

Related: Clean Energy Investment Hit $1.1 Trillion In 2022

What it has responded to favorably is the greater demand for natural gas, which has driven higher production of the commodity and, consequently, lower gas prices in the world’s largest producer, which has provided some relief for energy consumers. The relief has been helped by lower European demand for U.S. gas thanks to the warm winter, which has kept gas storage relatively full.

The twist here is that because gas storage is full, European gas buyers will be forced to lower their purchases of U.S. liquefied natural gas for at least part of this year. This means a slower refill season and, likely, continued lower prices. These, in their turn, may lead to a slowdown in U.S. gas production growth, which will tighten supply.

Then there is the whole decarbonization drive, which in no way motivates new oil and gas exploration, even though offshore drilling is on the rise, and strongly. There is simply no way to square governments’ emission ambitions and the long-term security of oil and gas supply. This means that the industry will remain watchful and extremely cautious with investment decisions.

A slowdown in the profit boom will support this sentiment. The FT reported this week that although Big Oil profits for 2022 will be massive, this year may be a bit different because of the price decline. According to estimates by S&P Capital IQ cited in the report, Big Oil’s collective profits this year could come in at $50 billion below last year’s haul, which stood at around $200 billion.

Now, $150 billion would still be quite high as profits go—it would, in fact, be the second-highest net result for Big Oil in history after last year’s record. Yet it will likely continue to fuel share buybacks and dividend increases rather than generosity with new production. That’s especially likely to be the case in the context of expectations that the global economy may slip into a recession this year.

According to Reuters’ John Kemp, the question about global recession is when rather than if. In a recent column, the agency’s market analyst argued that either the economy would slow down because of inflation and recession would result, or central banks would continue with their aggressive approach to said inflation and eventually cause a recession.

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Under the first scenario, the recession will begin in the first half of the year and, under the second, it could be delayed to the second half or even early 2024. In such a context, and with windfall taxes in place, the industry is quite justified in taking the cautious path and not jumping at government calls to pump more oil and gas.

Cautiousness may even deepen if, as Wood Mac expects, some governments move to raise dividend taxes and share buyback taxes. And this suggests that the energy security these same governments want to enhance by motivating more oil and gas production will be left to market forces, regardless of the government’s efforts.

By Irina Slav for Oilprice.com

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