Oil Companies Increase Exploration Investments Amidst Rising Fossil Fuel Prices

In the context of the current surge in fossil fuel prices, partly influenced by the ongoing conflict in Ukraine, oil and gas companies are channeling their record profits into further exploration and development of new hydrocarbon deposits. This trend is occurring despite the United Nations’ calls for a reduction in hydrocarbon use to mitigate climate change risks.

Industry data and statements from executives indicate that this resurgence in exploration is largely driven by investor demand for maximized returns from oil and gas ventures, rather than investing in renewable energy sectors, which typically yield lower margins.

The International Energy Agency (IEA) projects a significant increase in global investments in upstream oil and gas activities, estimating an 11 percent rise to $528 billion in 2023, marking the highest level since 2015. Barclays also forecasts a surge in offshore projects, expecting approvals to hit a 10-year peak this year.

European oil majors, in particular, are showing a renewed interest in expanding oil and gas reserves and production. This comes after companies like Shell and BP had initially slowed down their transition from traditional fossil fuel businesses to renewable energy investments.

Historically, upstream oil and gas ventures have offered returns between 15 to 20 percent, compared to the up to 8 percent returns typically seen in renewable energy projects.

Data from Baker Hughes, an oil services firm, indicates a rebound in the use of offshore drilling vessels for oil and gas exploration and production, returning to pre-pandemic levels in May. This marks a 45 percent increase from the lows experienced in October 2020.

Wood Mackenzie, a UK-based research and consultancy firm, anticipates a continued rise in offshore exploration and drilling activities, projecting a 20 percent growth by 2025. They also predict significant investments, up to $185 billion, to develop approximately 27 billion barrels of oil reserves, with international oil companies focusing on costlier, higher-return deep-water projects.

Namibia, which is yet to commence oil and gas production, has seen heightened interest following discoveries made by Shell and TotalEnergies off its coast.

In China, despite being a major investor in wind and solar energy, there has been an increase in calls for more coal-fired power plants, following economic slowdowns, power shortages, and factory shutdowns. While China continues to expand its renewable energy capacity, the construction of coal-fired plants has also been growing in recent years.

Global Warming Concerns These developments occur against a backdrop of rising global temperatures and record heatwaves. The United Nations Secretary-General Antonio Guterres has repeatedly emphasized the critical choice facing humanity in addressing global warming, warning of severe consequences if collective action is not taken.

As climate talks are being prepared for later in the year, there have been instances where average global surface air temperatures have exceeded 1.5C above pre-industrial levels, according to the Copernicus Climate Change Service. Parts of North America have experienced temperatures around 10C above the seasonal average, accompanied by widespread forest fires and smoke coverage across Canada and the United States.

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