Expert Insights: Energy Trends in the Oil & Gas Sector

In recent years, energy has been a consistently high-performing sector; however, some investors worry about the terminal value of their investments, as new technologies and renewable energy jeopardize the future of the industry. Despite market volatility, energy remains a viable opportunity for generalists, technology, or consumer-focused investors.

Making strategic investments in the rapidly evolving oil and gas industry can be challenging, from navigating volatile oil prices to incorporating environmental, social, and governance (ESG) considerations into your investment strategy. However, keen investors understand that much of the modern world depends on oil and gas and will remain so for the foreseeable future. 

AlphaSense, a leading market intelligence platform, provides Expert Insights and powerful artificial intelligence (AI) technology for investment professionals looking for opportunities in the oil and gas industry.

In this blog, we explore energy trends in the oil and gas industry, from rising global demand to oil production, with expert perspectives from the AlphaSense expert transcript library. 

The Current State of the Oil and Gas Sector

The energy sector has a history of cyclical behavior. In a more recent cycle, it thoroughly disappointed investors when excess oil and gas supply kept oil prices down for a prolonged period of time. It’s likely that the sector is bound by ESG constraints that call for divesting these carbon-producing assets.

Many investors may worry about the terminal value of their investments in the sector, as new technologies and renewable energy can signal rapid shifts for the industry, leading to an overall unpredictable market.

Others have determined that they have no edge in forecasting oil and gas prices, categorizing the sector as uninvestable for them. Due to these factors, the energy sector is currently just 4.2% of the S&P 500 index. To put that in further perspective, the tech sector’s weight in the S&P 500 is roughly eight times that of energy, a gap wider than at the height of the internet bubble.

To go even further, Nvidia, surging 40% since the end of 2023, hit a market cap of more than $1.7 trillion in February of this year, solidifying this tech stock as valued higher than the S&P 500’s entire energy sector, which includes ExxonMobil (XOM) and Chevron (CVX). 

The Rise in Global Demand for Oil

When thinking about oil and gas demand, it is important to distinguish between relative and absolute terms. Consider the projections by the Energy Information Administration (EIA). Even as the share of renewable energy increases, absolute oil and gas demand is expected to rise over the next few decades.

As per the EIA, petroleum and other liquids and natural gas consumption will increase at a low single-digit level due to population growth and industrialization of emerging countries, even as the relative share of renewables grows. According to the EIA energy consumption forecast, liquid fuels will remain the largest energy source in 2050.

A report by Columbia University finds that the world’s oil intensity—the volume of oil needed to produce a fixed economic output—has been consistently declining in a linear trend as humans have become more efficient at using it.

The main drivers have been technological innovations and the globalization of markets, which have enabled faster diffusion and adoption of technology. This is likely the case going forward, but this does not mean less absolute oil is needed. With increasing industrialization and innovation, human beings have demanded more oil.

The growth in world demand has been remarkably consistent, as shown in the chart below. Oil demand is a function of population growth and industrialization. While climate activism has been intensifying in Organisation for Economic Co-operation and Development (OECD) countries, politicians in emerging markets prioritize alleviating poverty, growing their middle class, and industrializing. This path still involves substantial fossil fuel consumption with little alternative, particularly in emerging markets.

According to Worldometer, oil consumption per capita for India is 50.9 gallons,, 139.9 gallons for China, and 922.4 gallons for the US. Even if OECD countries curtail their oil usage, non-OECD countries are still on the path to increasing usage.

Oil Versus Renewables

Consider the cases of Norway and China. Norway is the most advanced in electric vehicle (EV) penetration and has tilted incentives heavily in EV’s favor. According to Reuters, battery EVs account for about a quarter of the total car fleet, and the Norwegian EV Association expects battery EVs to account for 95% of all new car sales in 2024. Due to this, gasoline and diesel sales in the country have declined by about 9% over the same period.

Contrastingly, in China, despite being the largest EV market in the world by volume, where more than one million EVs were sold in 2021 (accounting for about 5% of total car sales), gasoline demand continues to grow, primarily due to the growth in overall personal mobility demand.

While the electric vehicle market is growing, physical constraints, including the supply of key materials for electrification, curtail the speed of demand substitution. For example, lithium prices have shot up five to tenfold since 2020 levels.

In many cases, the supply constraints for these materials are just as restricting as those for oil and gas, which can also be caused by environmental and political factors. Another under-discussed constraint on EV penetration is the electrical grid, which will have to undergo substantial investments if it is to accommodate the ambitious projection of EV adoption in the coming decades.

From an investor’s standpoint, the argument should not be about oil versus renewables, even though the narrative has always been constructed this way. The energy transition will take place over decades and will likely be an incredibly daunting and disruptive process. During this journey, we see great potential for oil and renewables investments to do well.

Trends in Oil Production

For the last decade, the gas produced in the United States has been trapped domestically, which kept prices relatively low. Increasingly, with the buildout of liquefied natural gas (LNG) terminals, gas is becoming an international commodity—just like oil.

With Europe’s efforts to wean itself off Russian natural gas due to the conflict with Ukraine, US LNG exports to Europe have increased substantially in 2023. Production projects like Venture Global’s Plaquemines LNG and Cheniere’s Corpus Christi Stage II have raised the export potential for the US in recent years. US LNG baseload export capacity increased from about 1 billion cubic feet per day (Bcf/d) in 2016 to about 11.44 Bcf/d at the end of 2023.

The EIA stated in its Short-Term Energy Outlook (STEO) that US crude oil production will rise to 13.19 million barrels per day (bpd) this year. With crude oil prices hovering around $80-$85 per barrel, one expert suggests that production companies may not have been experience a lot of free cash flow due to this constant capital requirement.

“We did quickly realize, my gosh, the spend to not only increase production but also just to maintain production is significant in the unconventional space because the production depletes so quickly and you have to keep on reinvesting, drilling more wells, fracking more wells to not only increase your production but just even to maintain it flat.

We called it the hamster wheel. The 10 free cash flow curve is always pushed a little bit out to the right because you need to reinvest your cash capital to drill more wells…I think that was pretty much how everyone was, clearly not delivering enough cash.”

– Former Vice President, Global Wells and Seismic Delivery, BHP | Expert Transcript

But in the long term, the industry should see continued gains in automation and technological advancements. One expert is optimistic about technological advancement in oil and gas:

“I think you’re going to see the pace of technology adoption go a lot faster, because the world still needs a lot of oil…Most of oil and gas operations can be automated. It’s just a matter of putting the right sensors in place and computers in place. You can have people sitting in office and manage production. You don’t need as many people in the future. The future is digital, I have no doubt that the oil fields of the future will be almost completely, perhaps 70% automated. It’s happening.”

– Former Senior Engineering Advisor, Hess Corporation | Expert Transcript

Equipment has been another challenging area. During COVID-19, many companies were idling their equipment and using parts from the idle equipment for the active equipment as they struggled to obtain parts. However, service companies still operate at total capacity, resulting in smaller operators not getting the necessary equipment to grow.

According to one expert, supply chain disruptions and workforce issues have lead to difficulties in getting equipment back to the patch in order to increase production:

“Because of supply chain issues and people issues, will you be able to get your project on line in a given timeframe? Even though it’s profitable, you don’t have the equipment to go ahead and actually get it on line. That is an issue that we have to come to grips with. That’s a new thing which has come out of the COVID stuff. Nobody anticipated the supply chain business, nobody.”

– Former Chief Reservoir Engineer, Hess Corporation | Expert Transcript

Onshore Drilling

In onshore drilling facilities, the rigs and equipment are easier to maintain and can be mobilized, which makes installation processes significantly easier than those of offshore projects. Onshore production companies can turn rigs on and off more easily than offshore rigs to respond to changing market conditions and demands. Additionally, the process is more systematic, as the technology has been proven and additions to production simply require drilling more wells.

An industry expert describes the fast-paced, competitive nature of onshore development, citing organizational responsiveness and agile culture as key success factors:

“I do think that in Lower 48, it’s okay if a major wants to put some money on it, but I don’t think it can compete in terms of agility, nimbleness and the barrels are not as profitable as other basins where they can compete a lot better. The Lower 48 is great, but again, because it’s easy access there are many players.

I don’t think that is the right environment for one of the majors. I would leave it to smaller independents for them to fight for that production. It’s very fast-paced, again, very competitive, and I don’t think these big companies have the learning and agile culture to be able to adapt to that environment.”

– Former Director of Strategic Relationships, BP | Expert Transcript

Offshore Drilling

In contrast, offshore drilling has a longer lead time, is more complex, and is more expensive than onshore drilling. Operating conditions on the sea can be extremely rough. Every case is unique and has different seismic conditions. According to one expert, offshore drilling projects require advanced engineering and capital to make these projects viable.

“I do believe that where the big majors can really thrive is tackling these big, big basins where you have significant capital requirements, very high barriers of entry due to the capital requirements. Again, you need incredible technology and an amazing capacity to integrate to make these projects viable. If you look at what Exxon is doing in Guyana, what Chevron is doing in Australia, what BP has done in Azerbaijan, those are amazing things that there’s no way smaller independents can do.”

– Former Director of Strategic Relationships, BP | Expert Transcript

These projects are often very capital-intensive and can involve building infrastructure such as platforms, pipelines, processing plants, and possibly export terminals. While onshore projects can produce oil in as little as eight to twelve months, offshore projects typically take much longer (eight to ten years).

Currently, one of the world’s largest offshore investments is Exxon’s project off the coast of Guyana (Yellowtail). The $10 billion project will add 250,000 barrels per day of production starting in 2025 and total estimated resources of 900 million barrels. Exxon has been engaged in development in Guyana since 2015, and this is the company’s fourth and largest project in the region.

ESG Concerns

Many institutional investors have divested their oil and gas investments due to ESG concerns, and this trend has accelerated in recent years. Policymakers and investors have abandoned the sector, perhaps assuming the energy transition is just a few years away. The narratives have gotten ahead of reality.

After Russia’s invasion of Ukraine and the resulting energy crisis in Europe, many are re-evaluating their previous assumptions. More likely than not, this energy transition will take place over decades. Until then, we will have to learn to live with oil and gas—as recent years’ events have shown us.

It is important to note that within fossil fuels, natural gas is somewhat less exposed to environmental risk. This is because gas is significantly less polluting when burned for power generation than coal. Hence, gas is a vital bridge in the energy transition to systemic decarbonization.

According to the chart below, emissions per capita in the US have decreased significantly over the last two decades, coinciding with the shale boom. Much of this was enabled not by renewables but by the switch to natural gas. Per capita emissions of the United States are now on par with levels last seen in the 1950s to 1960s.

In Europe, natural gas was cheaper than coal. But due to supply disruptions from the war, gas prices have shot up, and it’s now cheaper to use coal. This drove up emissions and made it expensive for companies to purchase carbon emissions through the European Union Emissions Trading System.

As a result, policymakers have become more flexible on carbon emission prices to help industries and could perhaps introduce a wartime subsidy of the energy industry ahead of costly winters. This goes to show how susceptible climate policies can be to global conditions in times of crisis in the short term.

Playing offense, most oil and gas companies have established ESG policies and programs and have begun efforts to focus on their environmental impact. Here are some notable ones from the largest market players:

• In November of 2020, Occidental Petroleum became the first large US petroleum producer to set a net zero emissions target associated with their own emissions by 2040, as well as a commitment to reduce greenhouse gas associated with their products by 2050.
• Shell Oil held a shareholder vote in 2022 to approve its sustainability strategy, which was met with 89% approval. The strategy aims to reduce its carbon intensity by 100% by 2050.
• ExxonMobil plans to invest $3 billion on lower-emission energy solutions, which include carbon capture and storage, through 2025 to commercialize emission-reduction technology.
• BP has invested and continues to invest significantly in wind, solar, and hydrogen and is one of the largest contributors to renewable organizations globally. It aims to build 20 gigawatts (GW) of renewable energy capacity by 2025 and 50 GW by 2030.

While environmental issues still remain, investors can look toward entrepreneurial companies as emerging opportunities for substantial sources of revenue in the future years. Given energy security concerns and the efforts of energy companies to become net zero, it is likely that these companies will find favor within the investing community again.

Interested in learning more about emerging opportunities amidst the global shift toward sustainable energy? Download our comprehensive guide to best position your portfolio and maximize investment opportunities in the space, Oil and Gas Deep Dive: An Investor’s Guide in an Era of Energy Transition.

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Making strategic investments in the rapidly evolving oil and gas industry can be challenging, from navigating volatile oil prices to incorporating ESG considerations into your portfolio.

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