Insight

The uncertain state of the world's oil supply

Seven keys to get your company ready for the unexpected.

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Angie Gildea

National Sector Leader – Energy, Natural Resources and Chemicals, KPMG in the US

+1 713-319-2295

In 2022, we are seeing the results of a supply shock with a tight oil supply and supply disruptions driving prices well north of $100 / barrel to near record highs. But believe it or not, there is a scenario where we can see a situation with excess supply later this year or early next. Volatility will likely be with us for some time.

Drilling Down: A focus on geopolitical and cyber security risks.

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The potential oversupply scenario happens if OPEC makes good on its commitment to continue unwinding the supply cuts it made in 2020, and U.S. unconventional production grows as much as some analysts are forecasting. If these events occur, organizations may end up with an oversupply of oil, with as much as an extra 6.4 million barrels per day late this year. Add to that a potential new nuclear agreement with Iran and the volume of new oil coming onto the market this year will be even higher; some estimates have Iranian exports growing by up to a million barrels a day within a few months if a new pact is struck.

For the time being, we’re still experiencing a tight oil market although many are forecasting a growing oil surplus beginning in the second half of the year.

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Impact of rising tensions with Russia on Europe's gas supply and prices

Russia’s invasion of Ukraine has prompted the U.S. and EU to impose severe economic sanctions on Russia.

This tense geopolitical issue is casting a long shadow over gas supplies and prices, especially in Europe.

Reductions in Russian spot sales of gas to Europe in late 2021 contributed to an energy crunch and record natural gas prices in the EU. The fear now is that fighting in Ukraine and the impact of sanctions will disrupt much larger volumes of gas, keeping prices high and undermining EU economic growth this year. If Moscow were to retaliate to U.S. and EU sanctions by cutting off all gas exports to Europe, the results would be even more onerous for European economies.

"In some parts of the world, energy transformation and energy security are seen as being synonymous rather than disruptive."

Regina Mayor
Global Head of Energy,
KPMG U.S.

How this crisis plays out in the longer-term will have significant implications for the energy mix in Europe over the next 5-10 years. There is one school of thought that Europe will delay implementation of some of its key “green transition” energy policies to avoid short-term pain. On the other hand, many believe that this vulnerability will motivate EU countries to double down and accelerate the pace of their transition to renewables and clean energy in order to decouple from reliance on Russian gas. This will likely have a big geopolitical impact in terms of Russia's leverage over Europe, and also in terms of where Russia would sell its oil and gas supplies.

Is it politically feasible for EU governments to do this? Can the EU accept the potential short-term pain in terms of increased prices and limited gas supplies in order to gain a long-term advantage? And what steps will it take to ease burden on its citizens?

For example, Germany has said that, in light of the Ukraine invasion, it will not certify the Nord Stream 2 gas pipeline, which was designed to deliver more Russian gas to the EU.2 The bloc is also taking steps to displace some Russian gas with supply from the U.S. and Qatar until its transition efforts are further along and bear more fruit. These are all questions that many hope will be answered as the year moves forward.

Potential impact of global decarbonization efforts on the oil and gas industry

When it comes to global energy transformation efforts, it seems like it is one step forward and two steps back. While global energy transformation efforts to reduce emissions are being baked into policies around the world, it’s not a one-size-fits-all approach and it’s happening at different speeds in different countries. And as events in Europe illustrate, politics have a major impact.

Fallout from the Ukraine crisis may accelerate the EU’s “Fit for 55” proposals, which aim to reduce greenhouse gas emissions by at least 55 percent by 2030. Meanwhile, China also appears to be willing to put up with higher cost and burdens as it forges ahead with its emission reductions. It turns out that in some parts of the world, energy transformation and energy security are seen as being synonymous rather than disruptive.

Ultimately, the tension between governments’ balancing of long-term energy goals and the short-term needs of their citizens will make the road to energy transition extremely bumpy. Governments will have their work cut out for them in trying to minimize the pain that will likely be caused by the transformation efforts while still making progress on its energy policies.

"Beyond environmental and economic considerations, Geopolitical volatility is, more than ever, triggering a fundamental re-think of energy strategy around the globe. National security interests will likely determine the speed and direction of the decarbonization journey"

Stefano Moritsch
Global Geopolitics lead,
KPMG International

Hope for the best, prepare for the worst

It’s impossible to predict the future. Who could have imagined the COVID 19 pandemic that’s upended the world and the global economy for two years? Or the military invasion of Ukraine by the Russian government that what will likely be a profound political and economic global fallout.

Much of what may happen is out of the control of the oil and gas industry. However, the following are some steps you may want to consider taking so that your organization will be as well positioned and prepared as possible regardless of what occurs in 2022.

Have an ESG (environmental, social and governance) plan in place to proactively address activist investor and stakeholder concerns. Tackle the issues head-on rather than waiting to respond under pressure.
Review your organizations’ crisis playbook. Does it include all potential scenarios, and is it updated regularly?
Review your organization’s commodity risk management philosophy. Prepare for how short and long-term changes in the pricing environment could impact customer and shareholder sentiment, and also government involvement.
Understand how proposed legislation and government actions could impact your company: Determine if your organization has the flexibility to shift gears quickly to take advantage of opportunities as political agendas change.
Focus on relationship building: Continue or increase efforts to build relationships with all relevant stakeholders, including consumer groups, governments, regulators, and society at large. In the same way, consider industry and cross-industry cooperation efforts to proactively shape reasonable regulation with governments.
Get your supply chains in order: Review your current setup and determine how you can reduce disruption and improve resilience.
- For example, are your operations flexible and resilient enough to adapt and adjust in real-time to changes in trade flows, new regulations, continued COVID-19 disruption, climate change, trade tensions and other geopolitical movements?
- Is your technology current so you can reduce operating costs, provide visibility, and seamlessly diversify the way customer needs are met?
Review your organization’s cyber defense protection: The risk of a cyber breach is perhaps the most underestimated above-ground risk in the oil and gas sector. It cuts across political and geographical boundaries, and any company, regardless of size, is a potential target. No matter your location or where you operate, you are equally vulnerable to a cyber security breach.