Signal price

Our View: Differing Opinions on Policy vs. Pricing

Western oil companies have historically resisted government interference, but unprecedented intervention in the context of the current energy crisis – and the broader incentive structures driving the energy transition – now see them favoring government direction rather than price signals to guide investment decisions. Some major National Oil Companies (NOCs), on the other hand, still view conventional price signals as the key indicator of industry investment.

  • Speaking at the Energy Intelligence Forum in London this week, Saudi Aramco CEO Amin Nasser suggested that crude oil – of which the benchmark Brent has fallen around $30 a barrel over the past four month, at around $90 – was mispriced despite near-term recession fears given ultra-tight supply fundamentals. Nasser warned that oil is rapidly approaching the same state as global gas/LNG markets, which effectively have no spare capacity. “We only see short-cycle projects with quick payoffs, but not long-term projects that will maintain a plateau for a longer period,” he told delegates. Aramco’s capacity expansion of one million barrels per day will take until 2027.
  • Nasser acknowledged that pressure from investors and policymakers was limiting broader upstream investments regardless of price, but his focus on disconnects from the price signal misses the more fundamental change at play around how Western companies decide. how to manage capital. Shell CEO Ben van Beurden said energy infrastructure and capacity shortages cannot be solved by consumers simply paying an energy security premium for oil or gas. “You don’t get there by paying a little more for Saudi crude – you get there by a deliberate policy that sets this up,” he told the Forum.
  • We note that even when oil prices topped $100 earlier this year, international oil companies were still hesitant to commit funds to longer-term projects, with Van Beurden pointing out that multi-billion dollar increases in oil spending Investing was not something that could be done overnight. US shale companies have also stopped tying higher investments to higher prices. To complicate matters further, recent increases in interest rates – of which there are likely to be more – which increase the cost of capital for project developers, as noted by the former CEO from BP, Bob Dudley, now chairman of the Oil & Gas Climate Initiative.
  • Authorizations for energy infrastructure projects in Europe are blocked. Cepsa CEO Maarten Wetselaar noted that the continent is looking to import more LNG to replace the Russian pipeline, but LNG projects have taken five to six years to come on stream and need to be backed by a contract. 20 year supply. There is plenty of capital ready to help solve this problem, but there is a “bottleneck” in licensing and regulatory issues, Wetselaar said. “It’s a very boring topic, but this is what politicians need to do to help us get this transition started urgently.”