This research paper analyses three developments that are combining to transform the outlook for investment in the oil and gas sector: price volatility, a changing financial environment, and the strengthening of policy to mitigate climate change.
It explores the connections and mismatches between the three developments, assesses the implications, and suggests that - in the short and medium term - financial strategies will be critical in dealing with the mismatches.
In the longer term, climate negotiations should boost momentum for policies that reduce global demand for fossil fuels, drawing on political commitments made by the US, China, and the EU.
- The commodity cycle for oil is not under control, with mismatches between static Chinese demand and growing US supply, significant falls in prices, and a market without a regulator. Likely increased demand but lower supply may see producers take advantage of low prices to improve their portfolio.
- Capital for oil and gas investment is under pressure, as many companies struggle to cope with falling oil prices and cannot self-finance new investment. And uncertainty about oil prices has increased as a result of heightened commodity risks and long-term pressure on demand from climate change policies, while smaller and emerging companies depend on external finance in one way or another.
- Are oil and gas ‘in limbo’? High-cost and/or high-risk investment in fossil-fuel supply is subject to uncertainty about when stronger climate change policies will emerge, how strong they will be and how they will affect demand for the various fossil fuels. As long as the uncertainty over policy prevails, oil is in limbo and investment in it remains risky.
- Oil and gas reserves will not be the only assets in limbo, because achieving the reductions needed to limit climate change requires re-engineering every aspect of every economy.