In 2018, we witnessed further recovery in the liquids supply growth, driven by significant oil production contributions from US shale. Coupled with higher than expected oil production from OPEC+ countries and overestimated supply losses from Iran, this led to an oversupplied market and an abrupt oil price collapse towards the end of the year. In 2019, as a result of the OPEC+ agreement to cut oil supply by 1.2 million bbl/d, liquids additions are expected to stand at 1.8 million bbl/d, decreasing relative to 2018 and helping to balance the market. This article explains the key industry trends from this year, highlighting short-term supply growth, exploration success and spending trends.
Throughout 2018, we witnessed Brent oil prices steadily increase from around $60 per barrel up to a high of around $86 per barrel on October 3, 2018. Despite bullish market expectations for the future oil price development, a string of bearish news prompted a $20 per barrel oil price collapse that happened over the next month. Higher than expected oil production from US and OPEC+, coupled with overestimated supply losses from US sanctions on Iran, led to the oil price falling all the way to $59 per barrel on November 23, 2018. Even though OPEC+ has agreed to re-establish oil production cuts of 1.2 million bbl/d on December 7, 2018, we still see ourselves back in a $60 per barrel oil price environment, which was also prevalent at the end of 2017.
Figure 1 depicts Rystad Energy’s most recent forecast for liquids growth year-on-year to 2022 by supply segment and OPEC and Non-OPEC contribution. Driven by higher than expected production growth in the US, liquids supply has increased by 2.2 million bbl/d in 2018, surpassing our own guidance as of December 2017. In 2019, as a result of the OPEC+ agreement to cut 1.2 million bbl/d of oil supply from the October 2018 level, liquids volumes are expected to increase by 1.8 million bbl/d. If OPEC+ had not ageed to reduce output next year, we would have seen global liquids production grow by 2.4 million bbl/d. Demand, on the other hand, is expected to grow by around 1.2 million bbl/d next year, which would have led to an implied stock build of at least 1.2 million bbl/d in 2019, likely exercising additional downward pressure on oil prices. As a result of the production cuts – that are assumed to be prolonged for the full year 2019 - liquids production grows by 1.8 million bbl/d next year, reducing stock build to around 0.5 million bbl/d in 2019. While the market is still expected to be oversupplied next year, production cuts contribute to a more balanced market in 2019. In 2020, the gasoil market and, thus, the crude market will tighten due to the IMO 2020 sulfur cap in shipping fuels, supporting higher oil prices despite an oversupply in the liquids markets.
In terms of production contributions, we continue to see the largest liquids supply additions delivered by US, which is anticipated to grow by 2.2 million bbl/d next year. In fact, our sensistivity analysis on US shale indicated that even under a WTI oil price environment of $50 per barrel, US would still deliver 1 million bbl/d growth in oil supply, just 400,000 bbl/d below our current view. Furthermore, offshore deepwater projects are forecasted to account for 590,000 bbl/d growth in liquids production next year, amid decline estimated for OPEC and other onshore regions. If OPEC+ cuts are not prolonged after 2019, we will see supply additions of 2.5 million bbl/d in 2020, as US, OPEC, Russia and some other countries ramp up output further. In such a case, we are likely to again find ourselves in the oversupplied market post-2020, which is anticipated to bring oil prices back to below $70 per barrel. Therefore, we see the renewed need for market balancing on behalf of OPEC+ after 2020.
Figure 2 shows the global discovered conventional volumes by month from January 2012 until November 2018. Since 2012, global exploration performance has been for the most part decreasing. In 2016, total discoveries reached a record low volume; only around 8.3 billion boe was discovered. At the same time, average monthly volumes stood at around 700 million boe, compared to average monthly resources of well above a billion boe in the preceding years. 2017 has been an even more disappointing year for the exploration industry with only 7.5 billion boe of resources discovered. In 2018, we have seen an increase in exploration performance with monthly discoveries increasing to 800 million boe. Total volumes are now estimated to reach 9.4 billion boe, representing a 25% increase over 2017. Year to date, January, February, March and October have been the strongest months in terms of discoveries added. In October, Russian Novatek made the largest discovery this year. Its North Obskoye field in the Arctic is estimated to hold over 900 million boe of resources. Among other big discoveries are offshore Ballymore field in the US with 550 million boe of resources, and Longtail and Ranger fields in Guyana with resources of over 450 million boe each.
Figure 3 shows global E&P investments (capital and exploration expenditures) from 2012 to 2022 split by supply segment. Rystad Energy’s forecast as of December 2017 is also depicted on the chart. Total investments have been growing steadily until 2014, reaching almost $900 billion. As a consequence of rapidly falling oil prices that followed, upstream expenditures decreased by 25% in 2015 and an additional 25% in 2016. This year, the spending is expected to reach around $530 billion, an increase of 4% year-over-year. The forecast for the next three years is almost unchanged from December 2017, with a lower estimate for 2022 spending. The downward revision is primarily a result of lower activity expected from US shale/ tight oil, consistent with the lower base-case oil price in 2021-2022.
Next year, investments in shale are forecasted to continue to rebound, with a projected growth of ~8%. Conventional onshore investments are expected to grow by ~1% in 2019. Offshore will start to recover next year, with combined offshore (shelf, midwater and deepwater) investments increasing by 3%. Investments within the deepwater supply segment are expected to see growth close to 8%. The key driver is increased spending related to exploration. In terms of the geographical split, 2019 E&P investments are expected to grow the most in South America (Brazil, Guyana), North America, the Middle East and Africa (new LNG projects in Mozambique).
In 2018, production from US shale continued to grow, adding around 2.3 million bbl/d to the global liquids supply. In combination with higher than expected volumes from OPEC+, this led to an oversupplied market and a fall in the oil price towards the end of the year. To help balance the market, global liquids additions are expected to stand at 1.8 million bbl/d next year, compared to 2.2 million bbl/d in 2018. On the investment side, gradual recovery is expected to continue in 2019 with shale and offshore deepwater growing the most over the next two years.