Trends and challenges for the oil and gas industry in 2023

The oil and gas industry has had a tumultuous 2022. Russia’s invasion of Ukraine squeezed supplies, leading to fossil fuel shortages and skyrocketing prices. Energy majors enjoyed bumper profits, making them an attractive target for government tax raids.

Overall, 2022 has been a year of price volatility and huge uncertainty. And while prices should remain high in 2023, it looks like there’s plenty more unpredictability on the way. Here are the key trends and challenges for the fossil fuel industry in the upcoming year.

Price cap on Russian oil

The gruelling Russia-Ukraine war looks set to grind on for quite some time. Despite suffering heavy losses, humiliating defeats and crippling sanctions, the Kremlin seems neither willing nor able to withdraw its troops. As a result, we’re likely to see continued volatility in the oil and gas markets.

One big challenge to the industry in 2023 will be adjusting to the sanctions on Russia, particularly the oil price cap implemented by the EU and the Group of Seven nations (G7).

The impact of the cap is hard to predict, as it depends how Russia and other countries respond. Moscow has said it will not sell oil to countries abiding by the cap, which could lead to a sudden supply shock and a spike in crude prices.

The cap works mostly through an insurance ban on tankers carrying Russian oil, unless it’s bought at or below the cap. International shipping insurance is mainly controlled by the UK and the EU, but China – a key ally of Russia which has ramped up its purchases of discounted Russian oil – may even form its own insurance companies to circumvent the ban.

Whatever happens, there is huge uncertainty ahead. Companies may need to work on resilience and agility to prepare for a supply shock or a change in international shipping practices and processes.

European gas shortages

After Russia slashed gas supplies to mainland Europe this year, many countries were left scrabbling to find alternative suppliers to fill their depleted storage sites ahead of winter. The EU pivoted away from Russia, sourcing more gas from Norway, Algeria and the US, among other countries.

In addition, Centrica – the owner of British Gas – reopened its gas storage facility in the UK, which had been mothballed in 2017 when the British government refused to subsidise repairs. Meanwhile, several European countries – including Germany, the Netherlands and Greece – have chartered floating gas terminals so that they can receive and process seaborne gas deliveries.

In 2023, the EU and the UK may seek to further insulate their economies from gas shocks, particularly as the International Energy Agency (IEA) has warned that next winter could be even more challenging. We could see increased European investment in gas storage and processing sites, along with closer ties with gas exporters around the world.

Windfall taxes

As oil and gas prices soared, energy supermajors have reported bumper profits. For the first three quarters of 2022, the seven companies that are often lumped together as Big Oil – ExxonMobil, Chevron, Shell, BP, Eni, TotalEnergies and ConocoPhillips – saw profits reach above $170bn.

Meanwhile, consumers across the world have faced decades-high inflation. With wage growth limping behind, this has eroded real incomes. Unsurprisingly, governments with an eye on shielding their citizens (or being re-elected) have been considering ways to tax the huge profits.

The UK imposed an ‘energy profits levy’ in May, before toughening the tax in the November Autumn Statement. Meanwhile, the EU also moved towards levying a ‘solidarity contribution’ on fossil fuel producers’ earnings.

Looking ahead at 2023, these proposals could deter oil and gas ventures in Europe, with companies perhaps seeking other less hostile investment landscapes for exploration.

In the UK, the government did try to entice businesses by offering a 91% super-deduction on oil and gas projects in the North Sea. While this seems to have attracted some investment (Shell paid no windfall tax as of October 2022 as it had reinvested profits in the North Sea), many industry figures are wary of the open-ended nature of the energy profits levy and the uncertainty that it brings.

On the other side of the Atlantic, US President Joe Biden has been floating the idea of a windfall tax, although it faces fierce opposition from the Republican Party, who won control the House of Representatives in the midterm elections. The Australian government is also facing calls to tighten its existing taxes on fossil fuel producers.

If energy prices and profits remain elevated through 2023 – which they very much could do (see below) – we could see more and more governments raid fossil fuel industry earnings.

For the industry, this could mean smaller dividends to shareholders and a more hostile investment environment. Companies may choose to move operations elsewhere, but if enough countries impose similar levies then options may be limited. Businesses may choose to cut costs in other ways.

Supply and demand

There are a number of foreseeable supply and demand factors that could impact the oil and gas industry – as well as prices – in 2023.

One thing that could dampen demand is an expected global recession. Inflation has surged around the world, eroding incomes and driving up costs. In response, central banks are tightening monetary policy, choking off economic growth.

In addition, China continues to pursue its zero-Covid policy, hamstringing its own economy in an attempt to curb the spread of the virus.

As the world enters an economic downturn, global demand for oil will likely dwindle, putting downward pressure on prices.

However, as mentioned above, the ongoing Russia-Ukraine war and associated sanctions will likely keep supply short and prices elevated. Meanwhile, the OPEC+ oil cartel could cut production targets if demand or prices fall too steeply, even though many OPEC producers are already struggling to hit targets.

The prospect of supply shortages could be particularly worrying for the US, after President Biden drained the Strategic Petroleum Reserve (SPR) to its lowest level in 38 years. Despite pushing for green growth, Biden may be forced to back US fossil fuels.

The Biden administration has already eased sanctions on Venezuela, with the US once again importing crude from the South American country. If there is another oil supply shock, expect a reaction from the West.

With supply potential facing another squeeze, and countries desperately trying to shore up their energy security, there may be investment incentives and opportunities available – even as governments seek to take a cut from the industry’s bumper profits.