Swimming in oil? Get ready for the supply crunch

The world oil market is heading for a supply crunch on current investment trends, a new report warns. Wood Mackenzie, the Edin­burgh-based oil and gas consultancy, says that the severe drop in exploration and production (E&P) investment, as well as a string of poor exploration results, means the world oil market is on track to […]

The world oil market is heading for a supply crunch on current investment trends, a new report warns.

Wood Mackenzie, the Edin­burgh-based oil and gas consultancy, says that the severe drop in exploration and production (E&P) investment, as well as a string of poor exploration results, means the world oil market is on track to hit a shortfall of 4.5 million barrels per day by 2035.

The trend began even before the oil price crash, but has been made worse by the deep cuts in investment the industry has made since last year.

As WoodMac points out, the volume of newly discovered hydrocarbon liquids more than halved in recent years, declining from an average of 19 billion barrels each year in the 2008-11 period, to an average of 8 billion barrels a year in the 2012-15 period.

As well as lower volumes, the discoveries of the past four years have been largely “gas prone”, so that the drop in crude oil reserves has been even more dramatic.

The WoodMac report echoes warnings from other energy watchdogs, including the US government’s Energy Information Administration (EIA) and the OECD’s International Energy Agency (IEA), both of which have forecast that the oil price depression since late 2014 could eventually result in an equally sharp upturn in oil prices as investment in exploring for new oil provinces dries up.

The EIA has said that E&P investment cycles in the US track oil prices closely, with investment peaking in 2014 at US$158 billion, having averaged $122bn a year over the preceding decade as oil prices tripled.

US investment tracked plunging oil prices down last year, to just above $100bn, and the EIA says investment up until 2020 is likely to be well below levels of the previous decade as oil prices recover only gradually.

AlixPartners, a US consultancy, estimated that E&P investment by publicly listed oil companies globally fell from peak levels above $740bn in both 2013 and 2014 to $541bn last year, and it projects investment will fall further, to about $379bn this year.

WoodMac estimates that the proportion spent just on finding oil (exploration and appraisal) will average just $40bn a year up to 2018.

It is not just the level of spending that is worrying but the nature of that investment too, according to WoodMac.

“The shift in the industry’s focus towards exploring smaller near-field opportunities, with lower cost bases and shorter lead times, now means that fewer large, high-risk frontier finds are likely to be made in the near term,” says Andrew Latham, a WoodMac analyst.

Although the oil price crash has cut deeply into investment, the oil glut has taken some time to abate and most forecasters expect only a gradual recovery in prices.

As WoodMac points out, about 90 per cent of the oil discovered during peak investment years in the 2000s is yet to be produced, so that about 18 million bpd could be added to supply over the next decade from these discoveries to replace depleted reserves elsewhere.

But because of the long lead times needed to develop large, conventional oil finds, the market could start to move toward shortfall thereafter if investment trends continue over the next few years.

“Look, we know there are cycles in the industry and we’re not predicting there is going to be an inevitable shortfall,” says Patrick Gibson, the head of global oil supply research at WoodMac. “We’re just pointing out what are likely to be the consequences of current investment trends.

“The size and nature of the next tranche of discoveries is crucial for maintaining long-term global oil supply growth.”

Anthony McAuley covers the energy beat for The National

Source: Business

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