The annual CERAWeek by S&P Global energy conference in Houston, which wrapped up Friday, could not have come at a better — or more fraught — time.
Energy executives, policymakers and thousands of others gathered in Texas this week as Russia's invasion of Ukraine has thrust energy — prices, security, the transition to renewables — into the headlines, alongside the tales of human suffering.
Energy Secretary Jennifer Granholm was a keynote speaker, and she surprised the audience with a strong call to pick up the pace of oil production. Across hundreds of panels, and between every session in the conference's halls, experts debated what happens next, and what the global energy complex should look like going forward. Should the U.S. drill more oil and gas? Does energy security mean building out renewables and moving away from dependence on hydrocarbons? Will natural gas be the bridge fuel? What role do investors play in production policies?
On the ground at the conference, there was a sense of optimism among attendees in the oil and gas industry over the vital services that their companies provide. Through conversations with more than a dozen people, who were granted anonymity in order to speak freely about the companies they represent, opinions differed over matters including whether spiking oil and gas prices will fuel or cool the energy transition. But a common thread was that so-called traditional energy companies need to be part of the conversation.
"I actually feel very proud to work for an oil and gas company … we're providing energy for the people," said one conference attendee. "There has been kind of an attack on the oil and gas industry," said another, before adding that the conflict has put a spotlight on energy integration. "There will be an energy mix. We'll need fossil fuels and then we also need to move into renewable energy, but it has got to be a gradual process," the person said.
"I'm very happy to work in oil and gas … it is an industry of technology [and] innovation," one attendee put it. "I think our industry is leading the way," echoed another, adding that "natural gas infrastructure can contribute to ambitious environmental goals including decarbonization, and net-zero."
Energy transition is coming
At this point no one doubts, even in the oil and gas industry, that the energy transition is coming — it is, after all, unfolding before our eyes. But opinions vary widely on what the pace will look like. Projections for when oil demand will peak are all over the place. Against this uncertain backdrop, oil and gas companies have made some forays into decarbonization technologies like carbon capture and hydrogen, which were on display at CERAWeek. Companies including Exxon, Oxy, Saudi Aramco and Petronas had sleek displays showcasing their efforts on these fronts.
"It's pretty exciting," said one person. "There's a lot going on to shift and grow the industry away from what it used to be."
But in the short term, oil demand is projected to hit a high above 100 million barrels per day this year. And with prices already elevated the question of when, or even if, producers raise output is front and center.
"It will lead the industry to accelerate the energy transition, but in the near term I think that we will see more oil and gas because the world needs it," said one participant, who's a director at an independent oil and gas company.
Top of mind, of course, was Russia's ability to have a large impact on the global energy trade by controlling so much oil and natural gas production, and because the market is "so interlocked and interconnected."
Even before the Ukrainian crisis, oil prices had been slowly but steadily climbing out of the never-before-seen lows hit during the pandemic. The U.S. oil benchmark even briefly traded in negative territory as the virus sapped demand for petroleum products.
Oil price spikes raise recession threat
Demand has since recovered, while supply has remained constrained, pushing prices higher. The day Russia invaded Ukraine, the U.S. and global oil benchmarks jumped above $100, and just over a week later they topped $130. Brent crude, the international oil marker, nearly hit $140. Russia produces about 10 million barrels of oil per day, roughly half of which it exports. The nation is a key supplier to Europe, and fears of production loss in an already tight market sent prices soaring.
President Joe Biden has since banned energy imports from Russia, although the U.S. doesn't actually import all that much from Russia. It would be far more significant if Europe were to impose similar measures. Still, even before sanctions targeting the energy industry were announced, buyers were already shunning Russian products in fear of falling afoul of the restrictions.
While U.S. producers might previously have been eager to open the taps as prices climbed from $50, to $60, $75, $90 and then above $100, the companies have emerged from the pandemic with a different mindset. It's no longer all about growth — a point that was underscored again and again in Houston. Companies are focusing on capital discipline and shareholder returns in the form of buybacks and dividends. Once boatloads of cash are being returned to investors, it's not easy to go back to those very same investors – some of whom weathered years of poor returns – and say it's time to start drilling again.
That's not to say that production hasn't returned at all. The number of oil and gas rigs for the week ending Friday rose for the ninth time in the last 10 weeks, according to data from oilfield services company Baker Hughes. The number of oil rigs now stands at 527, which is the highest since April 2020. However, the number is still sharply below pre-pandemic levels, which had been above 700 rigs.
While the high fuel prices are unquestionably a gusher for the oil industry, at a certain point even oil companies don't want such high prices. It turns Washington's attention squarely on the industry, while also running the risk of tipping the economy into a recession.
"I think if oil prices continue to be high, we certainly go into recession," said one attendee in Houston who's the deputy director of production at an integrated oil company. Estimates for where oil prices go next vary widely, but some believe $200 is around the corner if Russia's war rages on.
"That's not good for the consumer. That's also not very good for the industry," noted another conference goer. The national average for a gallon of gas topped $4 on Sunday, and prices have jumped further over the course of the week.
Addressing climate change has been one of the Biden administration's key tenets, and oil and gas companies say policies have been unfriendly to their industry. Permitting delays are often cited. White House officials refute these claims, saying they've issued permits, but the industry isn't acting.
A plea for more drilling
But the administration's tone seemed much different in Houston on Wednesday, when Energy Secretary Jennifer Granholm addressed CERAWeek. She essentially pleaded with companies to drill, in a speech that was often at odds with the Biden administration's decarbonization goals.
She even appealed directly to oil and gas shareholders. "I hope your investors are saying these words to you as well: in this moment of crisis, we need more supply," she said before a room full of energy executives.
One person in the industry described the predicament that oil and gas companies find themselves in – beholden to shareholders even as officials ask companies to raise output – as a "self-inflicted wound."
"Investors wanted capital discipline from oil and gas companies in the U.S. As a result, we have been giving money back to shareholders by a lot," the person added. This decreases the companies' incentive to ramp up oil production quickly.
All else being equal, if oil and gas companies did decide to increase output tomorrow, it would still be months before operations are up and running.
"It's very hard to fix these things. Nobody has. … Nothing will be immediate," said one person.
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