For over 100 years the main story was one of growth in production to supply the largely Western- driven and emerging markets and the competition between private companies known as IOCs and government- owned companies known as NOCs. Right after crash of 2008, markets realized that the era of low oil prices had ended. Asian economies posed to be permanently the main destinations for more than three fourths of the Middle Eastern and North African producers.

On the other hand, technologies to improve efficiencies and cut consumption showed up strongly and proved to be eminent in the early years of the current decade. Renewable sources of energy are slowing but surely finding a rightful place in the global energy consumption. The industry’s response to these developments has implications for the global economy in general, and oil and gas producing countries in particular. In 2021, oil and gas supplied 67 percent of the commercial energy consumed in the world. However, gas share increased. Coal did not lag behind either. Oil and gas production and exports contributed to 25 percent of Russia’s GDP. Members of the Organization of the Petroleum Exporting Countries (OPEC) are more and less on the same page.

The present piece of writing aims to highlight some of the major challenges facing oil and gas markets in 2022.

The oil industry can no longer rely on its monopoly of the transportation market.

Use of oil products in transportation sector accounts for about half of the world oil market and most of its expected growth. This is showing signs of decline. Pandemic and emergence of distance working as a new and permanent new work reality, has led to consumption of less fuel and gas. Regular imposition of public or limited lockdowns means that there are still less physical movements in 2022 and perhaps beyond.

People have less mobility but more consumption. Consumption paradigms have changed from service economy to goods and less durable commodities.

Prices of consumer goods such coffee and beans and foodstuff have risen more than the prices for gas or other sources of energy. In the meantime, companies invest more for consumer goods rather than oil and gas.

Less gas consumption and less jet fuel used by airlines and aviation industry also means some idle capacity for refineries. Refining sector is a major part and sector of oil industry. Oil producing and consuming countries have heavily invested on downstream sector. In fact, major oil companies both NOCs and IOCs have been taking pride in their value chain system often referred to as A to Z. According to October 2021 report of IEA, global downstream investment has been sluggish by as much as 18 percent compared to the same month report.

I’m not going to engage on the subject of COP26 and Net- Zero emissions fantasy but a reference to distancing of car manufacturers from combustion engines to electrical cars needs to be carefully under surveillance by the oil industry. Electric vehicles are advancing more rapidly and faster than it was believed in 2019- 2021. According to recent studies roads and highways will see more electricity generated engines by as much as 12 percent. This includes vehicles charged by solar power, too.

The role of OPEC and non-OPEC is likely to change. I mean, OPEC + has come to stay. The next OPEC Secretary General may opt to rename the organization as OPEC + or something that would demonstrate a more permanent feature to the organization that was once OPEC.

In fact, current market monitoring committee is the reminiscent of OPEC back in 1980’s and 1990’s when OPEC ministers met more frequently than by annually. There weren’t summer and winter conferences.

Market dynamics have changed drastically. Fundamentals are not just about supply and demand. Several other factors are already showing up. In 2021, the world oil market was just discussing inflation and Federal Reserve’s decision on interest rates. By 2022, inflation will most likely be the dominant factor in the OPEC + policies agenda. As such, OPEC + will not only be the central bank of global oil market, but should as well act as a party to the world economy and international monetary decision making process.

OPEC + should also address the issue of capacity management. Capacity build up within and outside. Shale oil has to keep in touch and let the Organization to make better supply/ demand estimations.

Iran chose to form the gas exporting forum, GECF for a reason. Now over 20 years on, the global energy scene has witnessed that the current oil price hikes is gas- related. This is particularly evident in the 2021 electricity shortages in Europe. A total of 87 percent of EU electricity is generated by gas turbines. In fact, several oil producing nations including Iran are the victims of gas supply disruption.

Although Gas Exporting Countries Forum has had an acceptable performance since its set up, the GECF member countries expect the Forum to move toward elevation and while improving its image, in the transition period further foster the use of natural gas in the world.

It could possibly revise its statute to address such issues. This was the case for OPEC when it decided to review its statute to address prices, too.

In the meantime, gas diplomacy is at full swing and perhaps has never experienced something like this before. North Stream 2 gas pipeline is now being used as a weapon by the United States and Russian federation. Central Asia is busy building gas corridors but with no or little additional gas supply to Europe which needs it most for the first quarter of 2022.

Most oil producing countries face decaying oil fields. Most oil fields in OPEC + countries are in the last decades of their lifecycles. While countries are facing declining volume of oil production, the quality of their oil is in bad shape, too.

OPEC + needs to put the house in order. Members add to their contributions 400 tb/m. However, members do not deliver. OPEC + average quota compliance stood at 112 percent during the second and third quarters of 2021. This indicates that 23 members of OPEC + alliance have no spare capacity.

This did not lead to more investment and capacity built up in 2021. Uncertainties prevails. Major oil reserves holders like Venezuela and Iran are under sanctions. Other producers do not see encouraging signs from the market due to using oil as a weapon. Investment is encouraged by security of supply. Once the market is treated politically, investors keep distance. Quantity and quality of oil is declining and possibly 2022 won’t be any better.

In conclusion, 2022 will be an interesting year for the international oil market. As documented by the OPEC Secretariat, demand will continue to recover, but additional supplies will be forthcoming from Shale and countries like Norway, Canada and US. Small addition to supply may come from some African producers such as Guyana. As mentioned above, Shale oil will still remain a mistrial side of the international oil market. Shale does not proportionally respond to stable oil prices. It is realized that unlike conventional oil fields, shale oil cannot hold reservoirs as spare capacity. Once it starts producing it will have to carry on. Once production stops, it will have to undergo the entire process all over again. 

Environmental hazards from shale oil and gas is a major issue as well. White House environmental team is considered a radical one. As such shale producers and banks are skeptical to risk that easy.

However, gas will remain an important factor depending on 2022 winter weather. Severe winter may also mean less sun in summer and less solar capacity in Europe. In fact the golden era of gas is already with us. We may refer to gas as White Gold, as we once referred to oil as Black Gold.

Courtesy of Iran Petroleum