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Page added on May 22, 2017
Oil outlook – crunch time or gloom mongering?
That the global oil market is set to tighten over the coming years is not in doubt, but whether it’s time to hit the panic button over a future supply crunch is another issue.
Industry warnings over the risk of an oil supply “crunch” and a potential return to high-cost oil in the coming decade due to the massive cuts in upstream spending since 2014 have been circulating for some time.
The consensus is that rebounding US shale supplies will keep a lid on oil prices at least in the short term, but there is much less unanimity on whether the oil market will enjoy a soft or painful landing some five years from now.
The International Energy Agency in October said sliding levels of investment in conventional oil fields was putting future flows from the sector on a knife’s edge, threatening to create a supply gap of some 16 million b/d by 2025.
OPEC and a number of leading oil market watchers have also sounded caution over an impending return to an oil price bull cycle unless new oil projects are sanctioned quickly and the investment dollars begin to flow.
The underlying logic, they believe, is straightforward. After peaking at almost $700 billion in 2014, global upstream spending collapsed to $433 billion in 2016 following two back-to-back declines of about 25% a year, according to the IEA. As a result, more than 6 million b/d of projects have been postponed or canceled across non-OPEC and OPEC countries.
At the same time, oil demand growth is set to climb by at least 1 million b/d each year while field decline rates are accelerating, raising the requirement to fill an ever bigger hole in future flows from existing fields.
Global dependence on US shale output will grow but, the reasoning goes, even under the most optimistic scenarios, shale will simply be unable to plug
the impending supply shortage and OPEC’s own spare capacity will wear ominously thin.
By the IEA’s reckoning, demand for OPEC crude is expected to jump to 35.8 million b/d by in 2022, up from 32.2 million b/d last year.
The sharp increase means OPEC spare capacity will contract to less than 2% of global demand in 2022, a 14-year low and almost half the levels in 2008
when oil prices hit record highs.
MORE OIL SUPPLY READY TO BE TAPPED
But not everyone follows this line of thinking and many point to a more nuanced picture for global oil supply in spite of the acute spending slump since 2014.
For starters, upstream spending may be on a path to recovery. Final investment decisions on big upstream projects began to return at the end of 2016 and FIDs are expected to double globally this year.
The spending that does return will also stretch further than it did in the years preceding the 2014 price collapse. Soaring industry costs meant, up to then, many oil majors were effectively running to stand still in terms of production growth. In many cases, producers were even failing to achieve that.
With upstream industry costs shrinking at least 30% since the downturn, the impact of the falling capital expenditure is largely mitigated by falling
breakevens, many believe.
The potential for further cost cutting and efficiency gains in a $50-$60/b oil price world capped by US shale, has made Citigroup, for one, less pessimistic over a future supply gap, allowing more projects currently on ice to come to market.
Citi argues that the growth potential of deepwater and oil sands, in addition to further technological improvements and cost deflation, could also “neutralize” any supply tightness in the medium term.
Branding the US shale oil revolution “unstoppable” with oil prices above $40/b, Citi believes the US shale recovery will be more robust than most forecasts, potentially adding 3 million to 5 million b/d of new “short-cycle” supply to the market by 2022.
Outside the US, the availability of low-cost oil in Iran, Iraq and Venezuela, and the potential for supply surges from Russia and the return of disrupted oil in Libya and Nigeria will all play a part in offsetting delayed start-ups elsewhere, according to Citi.
One particular bone of contention is the expectation for accelerating field decline and depletion rates in response to the lack of activity on existing conventional fields.
After all, excluding US shale and OPEC producers, global rigs counts have almost halved since 2015.
There may be further good news for market balances on the demand side.
Oil demand growth is being tempered globally by efficiency gains which are cutting energy intensity and driving a further decoupling of economic growth and energy consumption.
Continued moves towards natural gas as the lower-carbon fuel of choice for the coming decades are also seen as weakening the world’s dependence on
liquid hydrocarbons.
For now at least, it seems the alarm-inducing headlines over the fallout from the recent upstream investment dearth have won the day. It remains to be
seen whether producers will rebound from the shock of low prices to prove the naysayers wrong.
11 Comments on "Oil outlook – crunch time or gloom mongering?"
CAM on Mon, 22nd May 2017 7:22 am
It seems that this author equates new oil finds with the amount of money invested in exploration. It may be all well and good to invest a lot of money, but doesn’t there need to be oil in the ground to be found. It seems that I have read that even though investments in exploration have been rising over the past decades, less and less oil is being found!
onlooker on Mon, 22nd May 2017 8:20 am
Our societies will literally soon not be able to afford oil both from a production and consumption side. But even more so we will develop quickly aversion to fossil fuels and they will be avoided as the effects of climate change become more pronounced and together both of these eventualities will spell doom for modern civilization. Too late to hit the panic button
CIA-MOLE on Mon, 22nd May 2017 8:40 am
This is what the rest of the world is like and there are people here who prater on endlessly about how America sucks.
https://www.youtube.com/watch?v=vmOoAWrn1kM
These showers are sold in the Phillpines and South America. I’m sure Russia is not too far behind.
Cloggie on Mon, 22nd May 2017 9:05 am
Desert reforestation made simple:
https://deepresource.wordpress.com/2017/05/22/land-life-company-desert-reforestation-with-cocoon/
rockman on Mon, 22nd May 2017 9:21 am
CAM – First from them: “OPEC spare capacity will contract to less than 2% of global demand in 2022”. Very uncertain given the complete lack of transparency of production inside OPEC.
From you: “It seems that I have read that even though investments in exploration have been rising over the past decades, less and less oil is being found!” Difficult to sort out the components. Most of the US capex invested in the last 10 years was not spent on “exploration” per se. The shale plays really ARE NOT exploration projects: the oil in the Eagle Ford et al was “discovered” many decades ago. OTOH the undrilled location potential isn’t as straight forward as a newly discovered conventional reservoir, such as those being developed in the Deep Water GOM.
The hundreds of $billions spent on the unconventional plays was more like a manufacturing process. A risky process with uncertain profitability. But subject to similar factors as Ford Motor Co: if the amount of public spending for its cars falls they’ll cut back production. Just as we saw with shale drilling when oil prices fell. But those undrilled location didn’t disappear: still available if the price of oil increases. Which is why we’ve seen more drilling the last year. But those wells ARE NOT discovering new oil reserves. So the increase in all capex spending IS NOT going for exploration.
Deep Water GOM: despite what many armchair “experts” have claimed those fields represent a DECREASE in the per bbl exploration costs. Yes: spending $100+ million to drill a single DW exploration well is a lot of capex. But discovering 100 to 300 million bbls by a single well hasn’t been seen in many decades…especially onshore. And not just bbls per discovery but much lower cost per bbl produced. Yes again: huge production facility costs and operations overhead. But you can end up with a field producing 100k to 300k bopd: unheard of for the most part for an onshore conventional field since the beginning of the petroleum industry.
And again despite what the “experts” say exploration has a much higher success rate in the last 20 years or so then ever before. Mostly due to advances in seismic. So identifying exploration prospects is much easier today…that’s not the problem. The problem is much fewer new fields left to discover. Even the big gains from the DW GOM will drop off sooner then later. The play actually began 4 decades ago with over 170 fields developed so far. All plays eventually get “drilled up” and new discoveries diminish towards an insignificant level.
So not a straightforward yes or no answer for you. The best we can do to get the “big picture” is appreciate the dynamics of the different components of the process.
bobinget on Mon, 22nd May 2017 9:53 am
CIA-Mole
Our German was giving a send-up of the Suicide Shower seen in every cheap rooming/boarding house in Central America. 90% of the time they are no threat. (not working).
For those who have had a problem with electrical inspectors, I’ve come up with the perfect revenge crime.
Gift (anonymously) your E inspector with a free trip to Costa Rica or Nicaragua. Book him into one of these back-packer ‘hotels’. First look, Inspector’s heart explodes, with no such thing as 911 in CA, problem solved, as President Trump might say.
Lucifer on Mon, 22nd May 2017 10:33 am
Why don’t you all just pray to God that there are a few more giant Ghawar oil fields to be found soon, that way most peoples dreams of business as usual will continue for a few more decades. Oh yes then there is the climate issue to deal with, oh well that is a small problem to sort out, right? But somehow i don’t think God will answer your prayers in the first place.
John Norris on Mon, 22nd May 2017 10:56 am
Thanks for the link Cloggie. Cool. Is the DeepResource blog yours?
Cloggie on Mon, 22nd May 2017 11:38 am
Yep.
rockman on Mon, 22nd May 2017 2:25 pm
Cloggie – Deep Resource: first thing that pop in my mind when seeing those words: Deep Throat. You might not be familiar with that old movie. Probably not a lot in common.
https://en.m.wikipedia.org/wiki/Deep_Throat_(film)
Sissyfuss on Mon, 22nd May 2017 6:19 pm
On no, Rocko, Cloglatio has a great deal of experience deep throating various cylindrical objects.