With Russian energy supplies becoming more unreliable, European oil and gas companies are increasingly eyeing US shales for investment, particularly the Permian Basin.

Natural gas supplies from Russia to Europe have become increasingly unreliable as the continent joins the US in opposing Russia’s invasion of Ukraine.

Russia may have recently reopened its Nord Stream pipeline carrying natural gas to Europe, but limited capacity to 40 percent and has reduced supplies to Germany to 20 percent. That is not enough to meet Europe’s needs, prompting European oil and gas companies to increase their investments in non-Russian assets.

That has companies casting their sights on US shale, particularly the Permian Basin. Bhargavi Gandham, Oil & Gas Analyst at GlobalData, noted that, with successful vaccination drives and easing of COVID-related restrictions, the Permian has surpassed pre-pandemic levels to reach around 5.1 million barrels a day in May of this year. Both Permian crude and natural gas production are expected to continue to increase as global energy demand rebounds from the pandemic and oil prices remain strong. Gandham added that several Permian operators, from Diamondback Energy to Pioneer Natural Resources to Devon Energy ad Chevron plan to ramp up their production and increase their investments. Already in 2022, he said, 15 major operators are planning to spend around $20.2 billion in the Permian, an annual increase of 16 percent over 2021 levels.

Gandham discussed the potential for increased investment in the Permian Basin by email with the Reporter-Telegram.

Q. Oil and gas investment – particularly in the Permian – have been shunned as institutional investors look to move away from fossil fuels. Would the returns being generated by oil companies (lessened as commodity prices ease) bring them back?

A. Not all institutional investors have moved away from fossil fuels. Several well-known financial institutions, such as Citi, Wells Fargo, HSBC, and Bank of America have provided capital for oil and gas in the current year and are likely to continue doing so as long as the sector is profitable. Recently, Citigroup tried to pivot away from fossil fuels – they put forward a proposal to limit their investment to this sector but met with opposition from their own shareholders. This shows that the oil and gas companies will continue to find financers among institutional investors, even if the number is lower than before. 

Besides, commodity prices are likely to remain high over the next few quarters due to the Ukraine conflict that has followed the post-COVID energy demand surge globally. Even the EIA expects the US WTI benchmark to average at over $90 in 2023. This would support revenues of oil and gas companies, who have already seen profits skyrocket this year amid high commodity prices. This, in turn, would encourage profit-oriented financial institutions to continue supporting fossil fuels.    Q. Other challenges are supply chain bottlenecks – difficulty obtaining the needed rigs, pipe and sand – and labor shortages. Could increased investment help meet these challenges?

A. Higher investment could reduce supply chain bottlenecks to a certain extent, but some challenges will still persist. A major concern for shale drillers in the US is the shortage of takeaway capacity to transport the crude oil and/or natural gas produced from their wells. New pipelines could take years to build as they might find it difficult to obtain environmental clearances and the regulations vary across different states. This difficulty to quickly expand pipeline capacity could also prevent companies from monetizing associated petroleum gases generated from oil shales. Also, there are state-wide mandates for the volume of gases that can be flared off, which could further limit the production growth in oil shales.

Q. You mention investment in non-Russian assets amid the Russian invasion of Ukraine. Could these additional investments help bring US crude (including from the Permian) to markets seeking to avoid Russian oil?

A. Yes, that is a possibility. The US has ramped up its exports to Europe, which is shunning Russian oil. For the first time since 2016, US crude exports to Europe have exceeded exports to Asia during January-May 2022.

Mella McEwen is the Oil Editor for the Midland Reporter-Telegram.