Is Energy Funding Keeping Up? Exploring the Investment Gap

In the world of investing, the energy sector, particularly upstream investments in oil and gas, stands out as a burgeoning field ripe with opportunities in 2024. As we've seen, demand for oil and gas has robustly rebounded post-COVID-19, underscoring the enduring role of oil in powering the global economy and securing energy for the foreseeable future. Despite a significant recovery in upstream asset development spending to nearly $500 billion annually, concerns linger about whether this investment level can keep pace with future demand.

The energy landscape of 2022, marked by surging prices and significant policy shifts, highlighted a renewed focus on investment within the oil and gas sector. This resurgence was fueled by a rapid escalation in energy costs, a recovery phase post-Covid-19, and geopolitical tensions, notably Russia's attack on Ukraine, raising concerns over potential supply shortages and fierce competition for resources. This scenario has sparked discussions around the "investment gap" – a concept pointing to the shortfall between current investment levels and what's necessary to satisfy future demand, suggesting that today's investment inadequacies may lead to future energy supply issues.

The idea that the world is paying the price for constrained supplies, a consequence of reduced investment post-2014's oil price crash, underscores the urgency for ramped-up investment efforts. While it's true that oil and gas investments haven't rebounded to early 2010s' heights, the industry's cyclical nature – where investment fluctuates with price trends – continues to influence funding directions.

However, the current energy crisis acts as a catalyst, bolstering hydrocarbon investments despite the energy transition and concerns over fossil fuel financing. Investments in oil and gas, though not yet at pre-pandemic levels, have seen a positive trajectory. The market's efficient allocation of resources to high-return projects suggests a robust mechanism at play, mitigating prolonged supply shortages.

In essence, the investment climate for oil and gas, driven by the promise of returns and buoyed by recent market dynamics, points to a sector ripe for investment.

The narrative around the perceived underinvestment in the industry has been challenged by experts like Wood Mackenzie, who argue that the current investment levels are adequate to meet demand through its peak and beyond. This perspective is underpinned by the development of giant low-cost oil resources, a disciplined approach to capital, and notable improvements in investment efficiency. However, aligning with the ambitious goals of the Paris Agreement poses a greater challenge, leaving a gap between current trajectories and the desired sub-1.5°C global warming limit.

Historically, the oil demand trajectory has been on an upward curve, driven by global population growth and economic expansion, particularly in the developing world. Despite a strong recovery in oil consumption post-pandemic and the ongoing global reliance on fossil fuels highlighted by geopolitical events like the Ukraine invasion, the rise in oil demand is expected to slow down after 2024, peaking in the early 2030s.

The transition towards a less carbon-intensive economy, including the adoption of electric and fuel cell vehicles, natural gas, and eventually synthetic fuels, will play a crucial role in shaping future oil demand. However, this transition will take time, with internal combustion engines expected to dominate new vehicle sales until the late 2020s.

‍
As we look to the future, the energy industry stands at a crossroads, balancing the need for continued investment in oil and gas with the global push towards sustainability. The question then becomes, what role will upstream investment play in shaping the energy landscape of tomorrow? And more importantly, how can investors leverage these opportunities to generate strong returns while contributing to a sustainable energy future?

As we ponder these questions, it's clear that the future of energy investing is not just about meeting immediate demand but also about navigating the complexities of the energy transition. How do you see the role of upstream investment evolving in this context?