Oil and natural gas are back in style. US President Donald Trump’s “drill, baby, drill” mentality is rippling through the global financial system, and ever-rising energy demand is giving fossil fuels a longer run than had been thought.
This may be welcome for Latin American producers after a sustainability push had threatened the industry’s viability, leading to talk of short windows for oil demand and a bit longer for gas as the fuel for the energy transition to net-zero emissions in 2050.
The International Energy Agency estimates that global oil demand will peak at 105.5 million barrels per day by 2030, curbed by the rising use of cleaner fuels. The Organization of the Petroleum Exporting Countries (OPEC), on the other hand, sees oil demand surpassing 120 million barrels per day in 2050, fueled by population growth. Meeting this demand will require an estimated $17.4 trillion in investments over the next 25 years, according to OPEC. By comparison, an estimated $110 trillion must be invested in clean energy between 2021 and 2050 to reach net-zero emissions by 2050, according to the Energy Transitions Commission, a London-based think tank.
The wide difference in these investment needs has sparked concerns that it may be unrealistic to reach climate goals by switching energy sources. What is more, the intensification of the Russia-Ukraine war in 2022 sparked a global energy crisis and exposed gaps in Europe’s energy supply, including an overreliance on Russian gas. The result is that climate risks have taken a backseat to energy security and affordability, with calls from oil companies to invest in oil and gas adequately to meet demand instead of phasing them out.
Despite this big change, oil companies have been adopting cleaner methods and investing in renewable energy to reduce their own greenhouse gas emissions. They may do this more slowly now, but sustainability is far from out. Gone are the days when oil producers could expect blank checks without considering their carbon footprints. Now companies are pairing drilling projects with reforestation and other carbon offsets. They’re investing in nascent technologies for capturing carbon dioxide at the wellhead and storing it deep underground. Some of this carbon dioxide is injected into maturing oil reservoirs to squeeze out more production, a process that leaves the carbon underground. And rather than being one-trick ponies, oil companies are increasingly expanding into biofuels, solar, wind and other renewable energies.
“There’s no turning back from decarbonization,” says Carlos Canales, a partner at the Mexico City natural resources law firm Canales Auty and a former head of legal affairs in Mexico for Shell, one of the world’s biggest oil companies.
Even so, investments in decarbonization are growing at a slower pace than what had been expected only a few years ago. Alonso Mago, the Houston-based head of international energy investment banking at Scotiabank, says oil companies are still focused on reducing emissions, improving water management, optimizing maintenance with artificial intelligence, developing hydrogen projects and accelerating the use of technologies for cutting their emissions. But they are investing “more selectively,” he says.
The bond market will be an important source of funding as the transition continues, Mago says. While existing investors have supported recent oil and gas issuances, there’s yet to be a meaningful broadening of appetite from investors who had avoided the sector in recent years, he adds.
“For the sector to deliver on both energy security and decarbonization, investors will need to re-engage and support credible just transition strategies across the value chain,” Mago says.
Steven Otillar, a Houston-based partner at the international law firm White & Case, says any new fossil fuel projects involve discussing its carbon intensity, a phrase that’s now “part of the common vernacular.”
Oil companies are still on board with decarbonization for two reasons. The first is that some of their key investors are prodding them to continue, while the second is the opportunity to shape the future of energy.
“This movement is not something that any single administration, any country, is going to stop or derail,” Otillar said. “The Queen Mary has turned and we are moving towards a lower carbon environment in the short term, midterm and long term.”
LONGER SHELF LIFE
The longer-than-expected use of fossil fuels is raising concerns, however. While the International Energy Agency and OPEC differ in their forecasts for the growth of world old demand, BloombergNEF, an independent research provider, offers a third outlook. It estimates that global oil demand will peak in 2032 at 104 million barrels per day. But instead of dropping sharply to meet net-zero emissions goals, oil demand will remain elevated at 88 million barrels per day through 2050, while demand for lower-emitting gas will keep rising, according to BloombergNEF.
Before the fall
Fossil fuel demand by sector in the slower economic transition scenario and the faster net-zero scenario (NZS) to reduce global carbon emissions.
The forecasts have raised concerns of a potential backpedaling in climate negotiations.
“I am worried,” says Alfonso Blanco, a former Uruguayan energy official who’s now the director of the energy transition and climate program at Inter-American Dialogue, a Washington, DC-based think tank.
The resolve of policymakers will face a test in November when COP30, the latest United Nations Climate Change Conference, will be held in Belém, Brazil.
Climate groups are pressing for more action as global warming surpasses critical thresholds and extreme weather events take a toll.
“COP30 comes at a critical juncture for the global climate movement, demonstrating to the world that the multilateral process remains essential to addressing humanity’s greatest collective challenge,” Tasneem Essop, executive director of the Climate Action Network International, said in January. “The stakes at COP30 could not be higher.”
BOOSTING OUTPUT
The global oil industry was slumping this year, as a supply glut collided with dampened demand from trade uncertainty stemming from Trump’s tariffs. Oil and gas prices have shown signs of a rebound since the new conflict between Israel and Iran began in June.
This is a boon for oil and gas producers in Latin America, many of which have been boosting output regardless of the ups and downs in a bid to meet rising global demand.
And, after shunning the sector for years, some lenders are returning to the oil sector. Otillar, the White & Case lawyer, says his clients have seen interest from banks that “would not even have looked at an oil and gas project” a few years ago.
That could eventually translate into wider access to financing and better terms, but for now the impact has been more intangible.
“More players means more liquidity, more availability, more transactions,” Otillar says. “I can’t put my finger on an exact basis point differential that I’ve seen, but it definitely feels like the clients seem to be happier, and there seems to be more liquidity.”
Argentina has been particularly busy, as oil companies capitalize on the huge resources in the Vaca Muerta shale formation to increase production with a view to becoming global suppliers, first of oil, then of gas. Brazil’s oil production is steadily rising, while exploration is active in Guyana, Suriname, the Caribbean and elsewhere.
Many investors are keen to see more production growth over building new wind or solar parks.
The market is not demanding the companies to invest in renewables. We see more interest in production growth
Andrés Cardona, CITI
“The market is not demanding the companies to invest in renewables,” says Andrés Cardona, a Citi analyst who covers Latin American oil and gas equities. “We see more interest in production growth.”
CURBING EMISSIONS
Schreiner Parker, head of Latin America at the research firm Rystad Energy, says oil companies will continue their push into renewables for what could someday be a major revenue driver.
“The genie is out of the bottle,” he says.
Julián Lemos, head of strategy at Colombia’s Ecopetrol, told investors in May that the state-owned oil company aims to increase its investment in renewable energies “because they contribute to the financial sustainability” of the company. Brazil’s Petrobras is “still on the lookout for the opportunities to decarbonize,” Magda Chambriard, CEO of the state-run oil company, told investors in May.
Though the pendulum has shifted, long-term pressures to decarbonize will remain, analysts at S&P Global Ratings wrote in a recent report.
“In our view, cutting emissions now will put oil and gas producers’ credit profiles in a better position should carbon regulations tighten further,” they wrote.
Eliminating routine gas flaring and leaks are low-hanging fruit for reducing emissions, they added. Replacing diesel-powered rigs and fracking fleets with ones that run on gas, electricity or renewable sources can also yield big benefits. Carbon capture technologies will help, but they are still “costly and difficult to implement at scale,” they said.
With some help from government funding, Norway can produce oil at a fraction of the emissions of projects in North America and the Middle East, the S&P analysts wrote. Norway’s Johan Sverdrup oil field has a carbon intensity of less than 10 kilograms of CO2 per barrel of oil equivalent, making it far less emissions heavy than the upwards of 80 kilograms for Canada’s oil sands projects.
Latin American oil fields rank relatively low on the carbon intensity spectrum, but in a world that will continue to scrutinize emissions — particularly if the policy pendulum swings back, adopting cleaner production methods gives producers an edge in selling their production.
“Those barrels that have that lower emission intensity will be an even more important part of the supply mix going forward,” Rystad’s Parker says. LF