In short, it depends, Ed Morse, the Global Head of Commodities Research at Citi, told Rigzone.
“Yes, there is a danger, or a risk at least, of a severely diminished ability to privately finance oil and gas projects,” Morse said.
“But the impact really depends on the pace of technological change and cost structures for alternative fuels,” he added.
“We are mainly looking at two main uses – transportation and power generation; and we are mainly looking at two types of economies – advanced and emerging. And we are looking at an energy transition process that gives rise to high prices at times, domestic and global tensions, and problems. So, it will be a bumpy road whether or not financing is available,” Morse continued.
“But it will be all the bumpier with financing restricted before a full enough transition to alternative fuels and storage/batteries are available for days when renewables are too intermittent,” he warned.
Morse told Rigzone that there is no doubt that the sources of financing oil and gas are diminishing, adding that there are financial institutions on the private side that are unwilling to lend for the development of certain types of projects.
“Large oil companies are not eager to enter expensive projects that take more than ten years for a return on capital,” Morse said.
“This is particularly true of European firms, which are basically limiting projects to those that yield a return on capital in five years,” he added.
“Others are investing where there is existing infrastructure, like the U.S. Gulf of Mexico or offshore Brazil,” he continued.
Morse also noted that small companies, particularly in the U.S. shale plays, are finding ample private capital to fund projects, but said are looking to see how they can maximize use of cash for reinvestment rather than relying on new capital, “so behaving as though capital is already constrained”.
Uneven Distribution of Resources
There remains uneven distribution of oil and gas resources, according to Morse, who told Rigzone that there are a lot of countries that do not confront significant financial impediments to invest, “especially those in the Middle East”.
“Many of them have sectors that are dominated by state-owned enterprises,” Morse said.
“They look likely to continue to invest. Saudi Arabia, UAE, Kuwait, and Iraq alone could add some 10 million barrels per day of liquids production (oil, condensates and natural gas liquids) within the next five years,” he added.
“That would be more than enough to meet the highest projected level of demand growth that I know of. But the private sector would either be prevented from investing or would find it risky. But capital could be available,” he continued.
Morse highlighted that “there is little danger that the world will run out of oil or gas resources at any time in the foreseeable future”.
Industry Unlikely to Run out of Funding Sources
When he was asked if there is a danger that the oil and gas sector runs out of financing in the future, Vikas Dwivedi, a Global Oil and Gas Strategist at Macquarie Group, said the industry is unlikely to run out of sources of funding and financing.
“With full understanding that there are lots of pressures for financial firms to exit the sector due to ESG concerns, we believe that oil and gas will remain a vital part of the global economy for a long time,” he told Rigzone.
“If the industry is well managed for the benefit of all stakeholders, funding will remain available even if the mix of providers and the type of providers changes over time,” Dwivedi added.
BNP Paribas Pullback
Earlier this month, BNP Paribas, which describes itself as the European Union’s leading bank and a key player in international banking, stated that it will reduce its financing of oil exploration and production by 80 percent by 2030.
In a statement posted on its website, the bank outlined that it would do this by no longer providing any financing dedicated to the development of new oil fields, phasing out financing to non-diversified oil exploration and production players which is intended to support oil production, and reducing the share of the general corporate-purpose facilities which is allocated to oil exploration and production.
BNP Paribas also highlighted in the statement that it will cease all financing dedicated to the development of new gas fields. The bank announced back in January that it is committed to reducing financing for gas exploration and production by more than 30 percent by 2030.
“It is one of BNP Paribas’ strategic priorities to make a significant contribution to the financing of low-carbon energies, mainly renewables, in order to support the broader economy’s transition away from fossil fuels,” BNP Paribas said in the statement.
“BNP Paribas has already largely shifted its energy financing activities. At year-end 2022, low-carbon energies accounted for nearly 60 percent of BNP Paribas’ total financing of the energy sector,” the bank added.
“As announced on January 24, 2023, BNP Paribas aims to further shift its energy-based financing to 80 percent for low-carbon energies, representing at least EUR 40 billion ($42.9 billion). In line with this commitment, BNP Paribas has decided to significantly reduce its support of the oil and gas exploration and production industry,” it continued.
In its statement, BNP Paribas highlighted that the bank has a target of deploying EUR 200 billion ($214.5 billion) “to support its clients’ transition to a low-carbon economy by 2025”.
“As BNP Paribas continues to align its loan portfolio with a net zero trajectory, the bank reiterates one of its key objectives from its GTS 2025 plan – to position the Group as a leader in the energy transition,” the bank said in the statement.
“BNP Paribas remains both strongly committed to and on track to meet its goal,” it added.