Oil and gas faces a balancing challenge in 2022

It is not an understatement to suggest that oil and gas has endured a turbulent couple of years, and that turbulence is likely to continue for some time. Companies, sectors, and the whole industry need to find new ways to balance very divergent needs and requirements, suggests Kay Rieck, an experienced market observer and investor.

The oil and gas sector faces several challenges, but overriding them all is the question of how it achieves balance over the next few years. This manifests in many ways, but let’s talk about a few simple examples.

The shutting down of the global economy during Covid-19 struck the oil and gas sector hard, so it is not surprising that as soon as economies started to reopen and demand for natural resources rose, prices were allowed to increase. The industry needed to recuperate after an exceptionally difficult period. As I have mentioned several times throughout the year though, the industry needs to balance its recovery as measured though profitability with letting prices rise too high and literally driving other industries to examine different ways of meeting their power needs.

The times they are a-changin’

In the past it has always been argued that alternative forms of energy will always be too expensive to become mainstream, but there are two reasons why this is no longer a safe assumption. Firstly, the price of alternatives is falling. In many parts of the world windfarms now dot the landscape without significant local objections and the price of alternative energy is falling to the point where demand is rising even after government subsidies (opaque though they are even in the best of times) are being removed.

Secondly, cost is increasingly being measured in ways other than price. In the past, politicians and corporate communications teams could wax lyrical in public about their commitment to the environment, but there is increasing pressure on both the political and commercial spheres to underline their commitments with genuine action.

Spinning wheel blues

There is also a question of balance in the levels of investment that companies need to make in order to maintain their viability. The activity around oil and gas takes a heavy toll on hardware and if machinery is not maintained, it loses efficiency and eventually breaks down, sometimes catastrophically. And if efficiency is lost, the cost of the end product rises, which feeds back to the point above about the fact that for the first time in the best part of a hundred years, the position of oil and gas at the centre of the global energy mix is under threat.

Adding to the quandary for the industry is that while we talk happily about the emergence of new technologies such as artificial intelligence, the blockchain, the internet of things and robotics and automation, it’s important to remember that they don’t come for free. Each of these enhancements has a cost, and again, after the last two years, they are a cost that could be difficult for the oil and gas to pay. So again, there needs to be a balance between the demands of today and the opportunities of tomorrow.

Communication breakdown

There is also the need to balance the needs of the business with the expectations of the investor. Oil and gas projects tend to need investors in order to proceed with a project, but investors expect a return on what they put in within a specified timescale. This means that, again, oil and gas projects need to balance short-, medium- and long-term needs.

The interesting thing here is that the blockchain could be in the process of creating new ways to bring in investors that are simpler to manage, whether the investors come from the traditional financial markets or, potentially, more localised participants that stand to benefit from a project. Again though, managing their rights as local investors with the wider needs of the business could create a whole new set of balance challenges.

In the end, the oil and gas needs to move past the most difficult period in its history and make sure it is in a good position to respond to the changing economic conditions that are likely to come through in 2023. This is going to involve moving beyond the simply chasing higher profits and thinking laterally about how to maintain a solid business in a thriving industry. It has never been as simple as discovering oil and gas in the ground and finding a way to bring it out, but it is getting more complicated as the years go by.