(Bloomberg) – The world is facing high energy prices in the foreseeable future as oil and natural gas producers resist the need to drill again, according to Chevron Corp. chief executive.
“There are things that right now interfere with market signals that we have not seen before. Eventually, things work, but they can eventually take a long time, “CEO Mike Wirth said Wednesday in an interview at Bloomberg News headquarters in New York. Expect strong prices for gas, liquefied natural gas and oil. at least “for a time,” without specifying a term.
Although oil and gas prices have risen this year as the world recovers from the Covid-19 pandemic, major producers have been reluctant to invest their money in new projects, a change in behavior with respect to on previous climbs. This is causing shortage problems. Europe is already facing the worst natural gas crisis in decades, with prices rising to record levels even before winter, when demand is usually strongest.
One of the reasons executives are wary of investing investment dollars in a new offering is that shareholders have not proven to be in their corner. They want them to return cash immediately instead of seeing it reinvested in new developments. While high commodity markets “indicate we could invest more,” stock prices send a different sign to boardrooms, Wirth said.
“There are two signs I’m looking for and I only see one” right now, he said. “We could afford to invest more. The equity market does not send any signal that they think we should do it.
Some investors are unwilling to support new projects after oil and gas companies squandered billions of dollars on low-yield operations over the past decade. Others look for signs of climate change and try to gauge whether companies are making changes fast enough. The risks are real: Royal Dutch Shell Plc was ordered to reduce carbon emissions by 45% by 2030 by a Dutch court earlier this year, and Exxon Mobil Corp was forced to back down in a aggressive expansion plan amid Covid-19 and shareholder unrest.
“You have some real new dynamics, whether it’s government policies, efforts to restrict capital to industry, to make it difficult for industry to access capital markets,” Wirth said. “This in the short term could create some risk to the global economy.”
Chevron, the second-largest Western oil company, is unlikely to be able to counter the trend and pursue new production, despite having the strongest financial position among its peers. Last year it cut its capital spending by almost a third and unusually pledged to keep it low until 2025. An announcement earlier this week to increase spending on energy transition technologies invests only a portion of these cuts.
When new projects are presented, their future emissions are “a big part of our decision-making process,” Wirth said. Chevron is committed to progressively reducing the intensity of its emissions over the next few decades, suggesting that operations with more carbon such as oil sands may have more difficulty receiving green light.
There may be some relief from oil prices, at least in the short term. OPEC’s ability to return to the market reduced barrels previously will help stabilize prices over the coming months. But with very restricted production off the cartel, prices in the medium term may remain strong, Wirth said. Slate producers, who have kept up pressure on prices for much of the last decade with oil floods, are now focusing much more on reaping profits rather than drilling new wells.
“Looking ahead to a few years if the global economy continues to grow and recover after Covid, is there enough reinvestment in the energy that is currently driving the world?” Wirth said. “Or are we turning so quickly to the energy running tomorrow that we created a short-term problem?”
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