The oil and gas sector has endured a turbulent few years, and the ramifications of the Russian invasion of Ukraine are creating further uncertainty. While there are some that suggest that the implications for the markets are not likely to be too far reaching in the long term, this may simply be a case of wishful thinking, observes Kay Rieck, an experienced market observer and investor.
It is incredibly hard to write something about the oil and gas sector in the current climate, because no matter how the position changes, it’s the people of the Ukraine that are suffering the brutality of an unprovoked, and increasingly seemingly ill-conceived, invasion. The rest of us can simply look on and try and make our way through the changed reality as best we can.
As I’ve mentioned previously, while the high prices of oil and gas are in the short term very good news for the oil and gas industry, in the long term there is a decent chance they will accelerate the move away from hydrocarbons and increase the speed of uptake of alternatives. In the case of electric vehicles, in many cases of course they will still be charged by electricity that is generated via natural gas, but the industry needs to be honest with itself: in the long-term the weathervanes point to change.
A further issue of the high prices came to light over the last couple of weeks, with the price of oil rising to around USD125 per barrel before coming back down to around USD95 before climbing again to its current level of around USD110.
Removing the politics from the situation as much as one can, this volatility is good for traders because it creates a chance for the very best of them to sense when the wind is changing and make a turn on their portfolios.
The problem is that for the wider oil and gas industry volatility on this level makes it incredibly difficult to make informed decisions about a project’s viability or otherwise.
The decision on when to drill for oil is based on a variety of factors, but one of the biggest is that it obviously has a massive impact on the returns you can expect to receive from the natural resources that you bring to the surface. The higher the price of oil, and to a lesser extent gas, the more it is worth pursuing deposits in harder to reach areas. It’s the market at its most efficient, but unfortunately the geopolitics of the situation is getting in the way.
The carrot and the stick
All this said, the high demand for oil and gas is likely to drive innovation and potentially tighten policies around the well-head. There are several emerging technologies that are making it more simple to manage extraction processes more efficiently.
During a period of great volatility and considerable uncertainty where exploration and production companies are uncertain about whether to commit to drilling in harder to reach, more expensive areas, it becomes worth examining how you can make the most of what you are already bringing out of the ground and tightening discipline on site to minimise waste.
At the same time, regulators in some countries have been trying to tighten their grip on oil and gas operators and create ways to force them to reduce wastage. They are increasingly turning to technologies such as drones, flying them over extraction sites with arrays of sensors so that they can track leaks that could be in violation of local bylaws.
The high value of natural resources could mean that there is both a financial and a regulatory driver to reduce wastage, which would be good for companies’ bottom lines and the reputation of the industry as a whole.
Ultimately from this perspective reputation management is going to be difficult over the next few months, and there may need to be a way to improve the interaction between price at the pipe and price at the pump. At we have discussed before, even if there are good economic reasons for it, the rise like a rocket fall like a feather strategy of gas prices on the petrol forecourt is unlikely to help anyone in the long term from a political perspective, particularly with increasing numbers of countries making serious moves to change their long-term energy policies.
There are those that are suggesting that while we need to look closely at the sources of our hydrocarbons, moving away from oil and gas would be foolhardy at a point where there is likely to be an enormous economic shock over the next few years. Unfortunately for all of us that have been active in the sector through our careers, the reality is likely to look very different.
There is an old Chinese curse to the effect of may you live in interesting times. What it means is that dull old stability is better than turbulent uncertainty. And turbulent uncertainty has certainly been the order of the day in the oil and gas market since the Kremlin took the decision to invade the Ukraine.
About the Author
Kay Rieck has been an investor in the US oil and gas sector for more than two decades. He was a financial advisor and stockbroker on the New York Stock Exchange (NYSE) for many years.
He quickly developed his interest in the oil and gas sector and related assets, building his expertise in investment banking and asset management at the New York Board of Trade and the Chicago Board of Trade.
Leveraging his exceptional network of global contacts, he founded his first oil and gas development company in the U.S. in 2008, selecting investments in the Haynesville Shale, Permian Basin, Eagle Ford Shale, Dimmit County, and anywhere else that offered and continues to offer exceptional return prospects.