Attendees at CERAWeek 2022 from S&P Global in Houston, Texas, USA on Wednesday, March 9, 2022
F. Carter Smith | Bloomberg | Getty Images
The annual CERAWeek conference hosted by S&P Global Energy in Houston, which concluded on Friday, was the best — or busiest — experience ever.
Energy executives, politicians and thousands more gathered in Texas this week as Russia’s invasion of Ukraine drew attention to energy – prices, security, the switch to renewables – along with tales of human suffering.
Energy Secretary Jennifer Granholm delivered the keynote and surprised the audience with her insistence on speeding up oil production. In hundreds of panels and between each session in the conference halls, experts debated what was next and what the global energy complex should look like in the future. Should the US drill for more oil and gas? Does energy security mean creating renewable energy sources and not being dependent on hydrocarbons? Will natural gas be the fuel for the bridge? What role do investors play in industrial policy?
On the ground at the conference, there was a sense of optimism among participants in the oil and gas industry about the vital services their companies provide. In conversations with more than a dozen people who were granted anonymity to speak freely about the companies they represent, opinions differed on issues including whether oil and gas price spikes would spur or cool the energy transition. But the common thread was that the so-called traditional energy companies should be part of the conversation.
“I’m really proud to work for an oil and gas company… we provide people with energy,” said one of the conference participants. “There has been a kind of attack on the oil and gas industry,” said another, before adding that the conflict has brought attention to energy integration. “There will be an energy balance. We will need fossil fuels and then we will also need to move to renewables, but it should be a gradual process,” the source said.
“I am very happy to work in the oil and gas industry… it is a technology industry. [and] “Innovation,” said one participant. “I think our industry is leading the way,” echoed another, adding that “natural gas infrastructure can help achieve ambitious environmental goals, including decarbonization and zero emissions.”
An energy transition is coming
At the moment, even in the oil and gas industry, no one doubts that the energy transition is coming – because it is unfolding before our eyes. But opinions vary widely on what the tempo will look like. Forecasts of when oil demand will peak are all over the place. Against this uncertain backdrop, oil and gas companies have taken some steps in decarburization technologies such as carbon capture and hydrogen capture, which were showcased at CERAWeek. Companies including Exxon, Oxy, Saudi Aramco and Petronas have provided elegant displays showing their efforts on these fronts.
“That’s pretty interesting,” said one person. “A lot is happening to change and develop the industry from what it was before.”
But in the short term, oil demand is forecast to exceed 100 million barrels a day this year. And given already higher prices, the question of when producers will increase production volumes, and even if they will increase at all, is in the first place.
“This will force the industry to accelerate the energy transition, but I think we will see more oil and gas soon because the world needs them,” said one participant, who is a director of an independent oil and gas company.
First of all, of course, was Russia’s ability to have a big impact on the world’s energy trade by controlling so much oil and natural gas production, and also because the market is “so interconnected and interconnected.”
Attendees at CERAWeek 2022 from S&P Global in Houston, Texas, USA on Wednesday, March 9, 2022
F. Carter Smith | Bloomberg | Getty Images
Even before the Ukrainian crisis, oil prices were slowly but steadily rising from the all-time lows reached during the pandemic. The US oil benchmark even briefly traded in negative territory as the virus eroded demand for petroleum products.
Oil price spikes increase the risk of a recession
Since then, demand has rebounded while supply has remained tight, pushing up prices. The day Russia invaded Ukraine, US and global oil benchmarks jumped above $100 and just over a week later, they topped $130. Brent crude, the international oil marker, nearly hit $140. Russia produces about 10 million barrels of oil per day, about half of which is exported. The country is a key supplier to Europe, and fears of lost production in an already tight market have led to prices skyrocketing.
President Joe Biden has since banned energy imports from Russia, even though the US doesn’t actually import much from Russia. It would be much more important if Europe introduced similar measures. However, even before sanctions were announced against the energy industry, buyers were already shunning Russian goods for fear of violating restrictions.
While US manufacturers may have been eager to open taps before when prices rose from $50 to $60, $75, $90 and then over $100, companies emerged from the pandemic with a different mindset. It’s not just about height anymore, a point that has been emphasized again and again in Houston. Companies focus on capital discipline and shareholder returns in the form of buyouts and dividends. After a ton of money is returned to investors, it’s not easy to go back to those same investors, some of whom have endured years of low returns, and say it’s time to start drilling again.
This does not mean that production has not returned at all. The number of oil and gas rigs in the week ending Friday rose for the ninth time in the last 10 weeks, according to data from oilfield services firm Baker Hughes. The number of oil rigs currently stands at 527, the highest number since April 2020. However, this number is still well below the pre-pandemic level of over 700 rigs.
While high fuel prices are undoubtedly a source of income for the oil industry, at some point even the oil companies don’t want such high prices. This draws Washington’s attention directly to the industry, and also risks provoking a recession in the economy.
“I think if oil prices stay high, we will certainly face a recession,” said one of the attendees at the Houston conference, deputy director of operations for an integrated oil company. Estimates of where oil prices will go next vary widely, but some believe that $200 is not far off if the war in Russia continues.
“This is not good for the consumer. It is also not very good for the industry,” said another conference participant. On Sunday, the national average per gallon of gasoline topped $4, and prices jumped further during the week.
Attendees at CERAWeek 2022 from S&P Global in Houston, Texas, USA on Sunday, March 6, 2022
F. Carter Smith | Bloomberg | Getty Images
Fighting climate change has been a key tenet of the Biden administration, and oil and gas companies say the policy was unfriendly to their industry. Permission delays are often mentioned. White House officials deny these claims, saying they have issued permits, but the industry is dormant.
Call for more drilling
But the tone of the administration in Houston on Wednesday, when Energy Secretary Jennifer Granholm addressed CERAWeek, seemed very different. She essentially implored companies to drill in a speech that often ran counter to the Biden administration’s decarbonization goals.
She even went directly to shareholders in the oil and gas industry. “I hope your investors are saying these words to you: in this moment of crisis, we need more supplies,” she said in front of a room full of energy executives.
One industry official described the predicament oil and gas companies find themselves in (obligations to shareholders despite officials asking companies to increase production) as a “self-inflicted wound.”
“Investors wanted capital discipline from oil and gas companies in the US. As a result, we returned money to shareholders a lot,” the source added. This reduces the incentive for companies to rapidly increase oil production.
Ceteris paribus, if oil and gas companies decide to increase production tomorrow, it will be months before operations are launched.
“These things are very hard to fix. No one has done… Nothing will happen immediately,” one person said.