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Page added on September 25, 2016
Oil Investment Crash Could Continue For Another Year
Investment in upstream operations in the oil and gas industry shrank by a quarter last year and is expected to continue shrinking this year by another 24 percent. Next year could see a continuation of the trend, which will represent the longest investment decline period in the history of the industry, says the International Energy Agency.
In its latest World Energy Investment report, the IEA points out that most of the decline in upstream investment – a decline of over $300 billion – was a result of lowered costs. This could suggest quickly improving efficiency of exploration and production, but it’s far more likely that the lower costs are a direct result of rigorous cost-cutting by E&Ps across the board to weather the effects of the oil price rout.
In absolute terms, investment in upstream oil and gas totaled $583 billion last year, representing the biggest single portion of investment in energy. Geographically, Russia and the Middle East were the most resilient producing regions, with state-owned companies such as Aramco and Rosneft accounting for 44 percent of the global total in energy investment last year.
On the other hand, 2015 upstream investments in North America were down over 50 percent from 2014, at $138 billion. Overall, however, North America accounted for the most investments in energy last year.
Hardly surprisingly, the share of investments in oil and gas declined in the overall energy investment mix, from 61 percent in 2014, during half of which oil prices were comfortably high, to 55 percent in 2015. This is still an impressive portion, especially in light of the international regulatory and lobbyist drive to tip the scales in favor of renewables.
Speaking of renewables, IEA’s report highlights the damage done to this industry by cheap oil and gas. The share of investments in renewables in the overall mix was 17 percent in 2015, up by just one percentage point from the 16 percent it accounted for in 2014.
Still, the IEA notes that wind and solar power has become noticeably cheaper, which has made it possible to expand generating capacity with lower investments. In the period between 2011 and 2015, renewable power capacity was boosted by 40 percent and power production from renewable sources jumped by a third, thanks to cheaper materials and installations, and adoption in countries “with better resources”. Last year, investments in renewables totaled $313 billion.
Back to hydrocarbons, the IEA’s report is bad news for the LNG industry, on which so many hopes are pinned as a cleaner but still hydrocarbon alternative to crude. In 2014 and 2015 investments in LNG peaked, according to the IEA, and this year has already seen a 30 percent drop in spending on LNG terminals. A big part of the decline is the fact that so many large-scale LNG projects came online over the last two years, bringing in a lot of supply, for which there is often not enough demand.
Overall, $1.8 trillion was spent on energy last year, spanning everything from hydrocarbon extraction to energy efficiency to power supply. The reductions in upstream spending were behind the fact that this total was 8 percent lower than the 2014 figure. It was also, partially at least, behind the drop in energy supply investment, which was last year at its lowest since 2010.
By Irina Slav for Oilprice.com
6 Comments on "Oil Investment Crash Could Continue For Another Year"
yoshua on Sun, 25th Sep 2016 10:12 am
Saudi Aramco and Rosneft counted for 44 percent of the $583 billion spent on upstream oil and gas capex last year ?
So they spent $256 billion together and if Aramco spent half or $128 billion and produced 3.5 billion boe, then Aramco spent $36 per barrel in capex.
My numbers are probably not correct… but anyway.
rockman on Sun, 25th Sep 2016 10:59 am
A very incorrect title. There has not been a crash in oil investments. There has been a crash in oil drilling investments. There have been, is currently and will continue to be huge investments in oil acquisitions. Already tens of $BILLIONS…perhaps well over. $100 $BILLION. We may be looking at the largest transfer of fossil fuel wealth in the history of the industry.
Yes: $billions in stock values lost, $billions in loans lost and $billions in drilling investments lost. But all that money wasn’t “lost”…it was transferred from Party A to Party B. Just as $billions aren’t lost yearly by gambling…it is just relocated. LOL. IOW those hundreds of billions of dollar bills were not pushed into a big pile and set on fire. Just as the billions of bbls of oil reserves developed in the last decade have not disappeared. Yes: not as much being developed now but virtually none of the production will disappear since it still generates positive cash flow.
And what’s the profit potential of this huge investments in fossil fuel underway? Very good! And why? Easy: the current oil reserves being acquired at a cost around 1/3 of the CURRENT PRICE OF OIL. IOW even if oil prices don’t increase the profits are locked in. The reality: typically the highest profit margins are created via acquisitions and not with the drill bit. Guesses vary but the shale reserves were developed for around 4X to 5X what they are being purchased for today. IOW shale production is now being acquired for about 20-25% of what it cost several years ago.
So for those companies surviving the price/drilling bust: do they sound like a “dying industry”? Those companies are acquiring hundreds of $BILLIONS in oil reserves on the cheap as the addition of new reserves have sunk during a time when the world is consuming record amounts of oil. Dying???
Those that say the oil business is dying suffer from a childlike inability to see the ” big picture”. LOL.
Boat on Sun, 25th Sep 2016 12:15 pm
rock,
Just like the housing industry after the crash. Many homes have been built since then and the old ones are still around. they are just owned by fewer people and investors.
rockman on Sun, 25th Sep 2016 12:25 pm
Yep. A geologist I worked with bought z3 houses in a subdivions after real estate bust in Houston in the 80’s. Paid about $30k each, made good money renting them for years and then sold them for around $120k each. He said his only regret was not buying more houses.
Stabilizer on Mon, 26th Sep 2016 12:01 pm
Rockman nailed it. Fossil fuels aren’t going away soon, particularly not oil and gas.
Right now, even with low cost drilling available everywhere, it’s still cheaper to buy an oil company to acquire reserves than it is to drill for the reserves yourself.
Also, buying existing reserves has the advantage of not adding more reserves to the WORLD supply, which assures a faster recovery and higher price spike overshoot when demand soars past supply.
Be prepared for a huge price spike. The oversupply was never very large to begin with, and is rapidly vanishing due to natural depletion of existing supplies.
For 40 years, the industry has “ridden” on elderly, but vast, oil reservoirs, discovering less every year than we extract from existing supplies.
Two of the 5 largest oil reservoirs dried up in the last 2 years, and the other “elephants” are declining fast.
It won’t be long before we are in a chronic shortage situation that will take several years to compensate for.
rockman on Mon, 26th Sep 2016 4:50 pm
Stab – “For 40 years, the industry has “ridden” on elderly, but vast, oil reservoirs…”. So 40 years…good call. Or maybe you’ve seen my posts on how my first mentor at Mobil Oil 41 YEARS AGO told me the EXACT SAME THING. As pointed out we didn’t call it peak oil but the reserve replacement problem. And it’s still the “RRP” and not “PO” especially for the pubco…even more so for the small/new pubcos.
Unlike XOM et al that pay dividins the only reason to buy small cap oil stocks or loan them capex is expectations of growth = an ever increasing base = higher stock prices. And as seen in the shale plays often took precedence over profitability. Which explains why so many shale players are going extinct: had the wells been nearly as profitable as they pledged their cash flow would have shrunk as prices collapsed but most would still be in the black. Not deep dark black but not red either.
After 4 decades in the oil patch and learning all to well how the game was played/rigged it was amazing to watch the fools rush in. Why the Rockman wanted to finish his run with a privately owned independent that never gave the shales a second thought.