July 30, 2015
By Per Magnus Nysveen, Head of Analysis, and Readul Islam, Senior Analyst, Rystad Energy
The current glut of oil supply and collapse in oil prices* are direct consequences of overinvestments by the oil and gas industry in 2013 and first half of 2014. The peak of oil and gas upstream investments was reached in 2013 when oil and gas companies invested as much as 900 billion USD in exploration, drilling, field development and field maintenance. This led to an increase of global supply of oil products from 90 million barrels per day in 2013 to the current output of 94 million barrels per day. As the growth of oil demand is gradually coming down thanks to more efficient consumption and maturing economies, most of this new oil is being stuck in storage tanks.
Due to the lower oil prices and reduced earnings, oil companies will this year invest 180 BUSD less than last year, or -21% down year over year. Spending next year is expected further down by 5-15% depending on the oil price trend during the coming budgeting season. Production lags investments with a minimum of six months for onshore drilling and up to ten years to develop oil sands mega projects and deep-water large fields. So we will not observe any significant shortfall of production before next year, and then even more in 2017. From then we find the industry would experience a new strong up-cycle from the second half of 2017 to maintain supply/demand balances at an adjusted new level.
We observe oil companies have so far this year decided to cancel or defer as much as 175 BUSD of future upstream investments by two or more years driven by the current trough in oil prices. 165 BUSD comes from 40 mega-projects globally (Figure 1), where we find 30 BUSD worth is delayed primarily for technical reasons (e.g. Yme by Repsol in Norway) or political reasons (e.g. Zabazaba by Shell in Nigeria). Also, we see delayed investment decisions of LNG liquefaction “midstream” projects in Canada worth 40 BUSD. We believe similar North American LNG export projects worth more than 50 BUSD will also be delayed. Another 150 BUSD should be added due to deferring more than 20,000 shale wells in US and Canada during the trough 2015 - 2016. We also see a shortfall of about 15% of offshore drilling on existing fields, or 500 offshore wells and 30 BUSD worth of drilling and completion spending per year. The latter also accounts for Brazil, where the local rig construction capacity is being reduced by 25%.
The list of deferred projects is dominated by Canadian oil sands projects as these massive projects require huge upfront capital outlays in addition to high ongoing operating costs and maintenance capital (example is Pierre River by Shell). Also heavily impacted are LNG projects requiring even more massive upfront spending (example is Arrow LNG by Shell/PetroChina in Australia).
Among the offshore project delays, we find roughly the same number of shallow-water and deep-water projects. However, the deep-water delays involve roughly double the reserves and triple the costs compared to the shallow ones. Involving more reserves and higher costs than shallow-water projects, deep-water projects, typically operated by the majors, require longer scrutiny before the sanction button is pushed.
With extensive offshore project delays in Norway, one could wonder why some of the other traditional offshore areas are hardly hit. The Gulf of Mexico (GoM) is represented by only one project delay, BP’s Mad Dog 2, and the situation does not look much worse for the UK and Brazil. The reason is related to the investment stage in these regions: GoM is just coming out of a heavy cycle of developments, with projects such as Jack-St. Malo (Chevron), Lucius (Anadarko), Mars-B (Shell) and Tubular Bells (Hess) having come online within the past 18 months. In the UK, work is ongoing at Clair Ridge (BP), Laggan-Tormore (Total) and Schiehallion-Loyal (BP). Brazil can be said to have escaped a bullet by getting its massive pre-salt projects off the blocks during a period of sustained high oil prices.
The impact on global production capacity from this massive shortfall of investments is estimated to be 2 MMbbld by 2020. We find those barrels are most likely picked up by core-OPEC countries, led by Saudi Arabia. Even though we can’t see the edge of the supply cliff yet, it will appear steep when we see it.
*Footnote: The current glut of oil supply should come as no surprise to the industry. Already June 18th 2014 we warned about an increasing risk of a dramatic glut to come. As we know by now, the Brent oil price peaked at 115 USD/bbl on June 19th 2014.
Contact: Per Magnus Nysveen, Head of Analysis
Phone: +47 24 00 42 00
Contact: Julia Weiss, VP Marketing
Phone: +47 24 00 42 90
Mobile: +47 48 29 87 61
About Rystad Energy
Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Africa as well as South East Asia.