Ukraine crisis challenges oil industry caution at high prices

Oil companies have so far taken a cautious approach to higher commodity prices, avoiding major new investment in drilling

As commodity prices soar, the Ukraine crisis has prompted demands from petroleum lobbies for a reboot of US energy policy to promote domestic oil and gas production.

But recent history suggests Wall Street may be an even bigger barrier than Washington to increased exploration and production.

That approach has reflected the clear preference within the investment community for producers to steer extra cash to debt reduction and shareholder givebacks, while also ramping up low-carbon investment initiatives.

Peter McNally, analyst at Third Bridge, predicted companies would not rush to shift strategies over the latest spike in commodity prices.

"The industry has twice been at price points like this over the last year and it hasn't ended well."

"Climate goals won't go away, but those long-term initiatives will wind up more balanced against short-term necessities," he said.

As the world's third biggest producer of oil and the source of as much as 40 percent of Europe's natural gas, Russia's centrality to the global economy as an energy producer has been a key factor in the West's response to the invasion of Ukraine.

The measures, though, stopped short of moving directly to impede Russia's energy production.

The situation means a "global energy crisis is likely to unfold," said a note from Rystad Energy CEO Jarand Rystad.

The American Petroleum Institute said Thursday that Biden should shift course due to Ukraine, calling on the president to allow more developments on federal land and in offshore areas and to clear red tape from the permitting process.

- Whither green energy? -

Senator Bill Cassidy, a Louisiana Republican, called for the United States to "flood" the world with cheap energy in order to "destroy" Russia's energy-financed "war machine."

Devon Energy last week released a 2022 capital budget range in line with last year, even as its earnings surged. The company authorized a huge dividend hike and touted its "limited" reinvestment of free cash.

Jim Krane, an energy analyst at Rice University's Baker Institute, said higher energy prices typically encourage the development of alternatives to fossil fuels.

"The world needs to get off fossil fuels and develop alternatives," he said, adding that the Ukraine crisis "might slow down the process in some places and speed it up in others."

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Originally published as Ukraine crisis challenges oil industry caution at high prices