Even though 2022 began with a positive outlook due to rising rig counts and commodity prices, no one predicted the turn of events caused by Russia’s attack on Ukraine. The outbreak of war in Ukraine caused an increased demand for oil and gas production as European countries boycotted Russian energy, thus putting pressure on U.S. producers to increase production.
Even with per-barrel prices surging in the first half of 2022, overall growth did not reach the levels expected at the end of 2021. Instead of the predicted 1 MMbbl/d oil range, most forecasts put growth last year at around 500,000 bbl/d. Many circumstances contributed to the moderate production growth: inflation, supply disruptions, shareholder returns, and reduced reinvestment in operations.
Now with 2023 underway, predictions are for increased demand for oil yet sustained moderate growth, citing continuing trends of 2022.
E&P Spending Growth
U.S. upstream capex is expected to increase by about 15% over 2022. Onshore spending in the U.S. is predicted to increase slightly more in the coming year. Globally, predictions have capex rising to $575 billion. With current inflation factored into expenditures, the increase is far below what experts believe is needed to meet long-term oil and gas demand.
Despite higher spending, E&P leaders remain cautious, which translates into continued capital discipline and underinvestment. Both will maintain favorable crude prices around the $75-$80 level. To improve portfolio ratings, many companies will continue returning cash to shareholders. Others look to increase valuation by reshuffling portfolios and reallocating capital to higher-return wells. In addition, some predict that the increasing demand for oil and gas will contribute to a 10% increase in upstream project investments.
Supply Questions Persist
Supply remains a concern for oil as sanctions continue for Russia and the U.S. needs to replenish reserves tapped into in 2022. While OPEC agreed to ramp up production to meet demand, it has not fulfilled its projected quotas to quell global needs. U.S. production may remain flat if most companies are not funding oil and gas ventures, further contributing to supply concerns.
Robust Oil Demand
OPEC predictions for 2023 include growth in global oil demand by 2.25 million bbl/d. Although global uncertainties remain, positive factors will also emerge; the possibility of a resolution in Eastern Europe and the relaxation of China’s zero-COVID policies will create a significant source of rising demand.
Energy Price Volatility
Various factors–both known and unknown–are expected to create volatility in crude prices. OPEC production for 2023 will not see an uptick due to recent output quota cuts. Continued sanctions will result in reduced production from Russia. U.S. output is forecasted to grow slowly due to the limited expansion of shale drilling activity.
Expect crude prices to average 7% lower than those of 2022. Still, the ongoing global uncertainty is predicted to result in an average of around $90, which is the highest average of the past decade.
Carbon Capture Opportunities
Expect to see carbon capture and sequestration (CCS) projects on the rise. Incentives from the Inflation Reduction Act include increased federal tax credits for CCS projects and fees for large operations emitting more than 0.2% of their gas production. Oil and gas companies are looking to invest in projects that capitalize on carbon capture and the new tax incentives.
Many new CCS projects announced in 2022 will become a reality in 2023. Big producers, like BP, can now plan carbon capture retrofits at existing refineries. Others want to capture CO₂ from hydrogen plants and natural gas power plants. Oil and gas companies also look to use CO₂ in enhanced oil recovery to achieve net zero-emission oil. While many new possibilities for carbon capture are on the horizon, demand concerns will take priority in 2023.
LNG Silver Lining
Growth in LNG exports is expected to increase in 2023. The need for U.S. LNG exports directly results from the urgent European demand due to the war in Ukraine. While European demand has driven up prices and demand, it is expected to decline in the coming years as European countries find solutions for renewable power generation. Many projects in the works may not see the finish line of construction due to potential changes in market demand.
Natural gas production is expected to rise. Past issues concerning a lack of pipeline capacity to transport LNG may end soon as new pipeline infrastructure should be complete and running by spring. However, many changing factors, like war, storage levels, and infrastructure, impact the LNG market, causing price volatility to continue in 2023.
While many global uncertainties continue to exist, demand for oil and gas will remain high. Oil and gas companies are looking to sustain profitability, resulting in the cautious investing of reliable assets. Overall, 2023 looks to hold steady growth for the oil and gas industry and sustained demand.
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