Governments pick up slack as oil firms pump less
HOUSTON — After years of pumping more oil and gas, Western energy giants such as BP, Royal Dutch Shell, Exxon Mobil and Chevron are slowing down production as they switch to renewable energy or cut costs after being bruised by the pandemic.
But that does not mean the world will have less oil. That is because state-owned oil companies in the Middle East, North Africa and Latin America are taking advantage of the cutbacks by investorowned oil companies by cranking up their production.
This shift could reverse a decadelong trend of rising domestic oil and gas production that turned the United States into a net exporter of oil, gasoline, natural gas and other petroleum products, and make America more dependent on OPEC, authoritarian leaders and politically unstable countries.
The push by governments to increase oil and gas production means it could take decades for global fossil fuel supplies to decline unless there is a sharp drop in demand for such fuels.
President Joe Biden has effectively accepted the idea that the United States will rely more on foreign oil, at least for the next few years. His administration has been calling on OPEC and its allies to boost production to help bring down rising oil and gasoline prices, even as it seeks to limit the growth of oil and gas production on federal lands and waters.
The administration’s approach is a function of the two conflicting priorities: Biden wants to get the world to move away from fossil fuels while protecting Americans from a spike in energy prices. In the short run, it is hard to achieve both goals because most people cannot easily replace internal combustion engine cars, gas
furnaces and other fossil fuelbased products with versions that run on electricity generated from wind turbines, solar panels and other renewable sources of energy.
Western oil companies are also under pressure from investors and environmental activists who are demanding a rapid transition to clean energy.
Some U.S. producers have said they are reluctant to invest more because they fear oil prices will fall again or because banks and investors are less willing to finance their operations.
As a result, some are selling off parts of their fossil fuel empires or are simply spending less on new oil and gas fields.
That has created a big opportunity for state-owned oil companies that are not under as much pressure to reduce emissions, though some are also investing in renewable energy. In fact, their political masters often want these oil companies to increase production to help pay down debt, finance government programs and create jobs.
Saudi Aramco, the world’s leading oil producer, has announced that it plans to increase oil production capacity by at least 1 million barrels a day, to 13 million, by the 2030s.
Aramco increased its exploration and production investments by $8 billion this year, to $35 billion.
“We are capitalizing on the opportunity,” Aramco Chief Executive Officer Amin Nasser recently told financial analysts. “Of course we are trying to benefit from the lack of investments by major players in the market.”
State-owned oil companies in Kuwait, the United Arab Emirates, Iraq, Libya, Argentina, Colombia and Brazil are also planning to increase production. Should oil and natural gas prices stay high or rise further, energy experts say more oilproducing nations will be tempted to crank up supply.
THREAT OF INSTABILITY
The global oil market share of the 23 nations that belong to OPEC Plus, a group dominated by state oil companies in OPEC and allied countries like Russia and Mexico, will grow from the current 55% to 75% in 2040, according to Michael Lynch, president of Strategic Energy and Economic Research in Amherst, Massachusetts, who is an occasional adviser to OPEC.
If that forecast comes to pass, the United States and Europe could become more vulnerable to the political turmoil in those countries and to the whims of their rulers.
Some European leaders and analysts have long argued that President Vladimir Putin of Russia uses his country’s vast natural gas reserves as a cudgel — a complaint that has been voiced again recently as European gas prices have surged to record highs.
Other oil and gas producers like Iraq, Libya and Nigeria are unstable, and their production can rise or fall rapidly depending on who is in power and who is trying to seize power.
“By adopting a strategy of producing less oil, Western oil companies will be turning control of supply over to national oil companies in countries that could be less reliable trading partners and have weaker environmental regulations,” Lynch said.
An overreliance on foreign oil can be problematic because it can limit the options U.S. policymakers have when energy prices spike, forcing presidents to effectively beg OPEC to produce more oil. And it gives oilproducing countries greater leverage over the United States.
State-owned energy companies are not merely looking to produce more oil in their home countries. Many are expanding overseas.
In recent months, Qatar Energy invested in several African offshore fields, while the Romanian national gas company bought an offshore production block from Exxon Mobil.
As western companies divest polluting reserves such as Canadian oil sands, energy experts say state companies can be expected to step in.
“There is a lot of lowhanging fruit state companies can pick up,” said Raoul LeBlanc, an oil analyst at IHS Markit, a consulting and research firm.
“It is a huge opportunity for them to become international players.”