Oil market starts to balance as demand growth set to outpace supply

January 18, 2016

Authors: Olga Kerimova, Senior Analyst, and Theodora Batoudaki, Analyst, Rystad Energy

Publisher: PESGB Newsletter, January & February Edition

2015 was a year marked by stronger demand growth, lower supply additions, especially from shale/tight oil, and E&P companies adjusting capital budgets to the declining oil prices, leading to lower investments this year and into 2016. This article explains the key industry topics from this year, highlighting short-term supply and demand growth, exploration success and spending trends.

As oil prices decreased further in 2015, following the ~30% drop at the end of 2014, liquids demand grew by ~1.8 million bbl/d (compared to only 0.8 million bbl/d in 2014), almost matching liquids supply growth. In total, 1.9 million bbl/d of new liquids production was added to the market in 2015, in line with Rystad Energy’s forecast at the end of 2014. Shale/tight oil from North America remained the primary source of new production, albeit with a significantly lower contribution than in the previous years, accounting for a net increase of ~0.95 million bbl/d. In 2016 Rystad Energy estimates that the liquids supply will grow ~0.5 million bbl/d, compared to a total growth of ~2 million bbl/d in both 2014 and 2015. This is lower than the estimated total demand growth of 1.1 million bbl/d forecasted by IEA. The source that is expected to contribute most with new volumes is offshore deepwater, along with shale/tight oil. However, the growth from shale is expected to be the lowest since 2009, with 2016 growth of ~0.3 million bbl/d. The deepwater growth comes as a result of the offshore investment cycle that occurred from 2010-2014, which is now starting to deliver volumes. The largest projects contributing to the growth are Lula (Brazil), Roncador (Brazil), Papa Terra (Brazil), Delta House (US) and Rio Grande (US). In 2016, Iran, Brazil and Iraq are expected to be the countries that will contribute most to liquids supply growth. For Iran the lifting of sanctions is estimated to give an additional supply of ~0.3 million bbl/d year-over-year. The relatively modest increase is caused by the assumption that the sanctions will not be lifted before the middle of 2016. Brazil is estimated to grow by 0.1 million bbl/d in 2016 as production is ramping up from new offshore projects. Iraq is expected to continue the growth in 2016, but at a slower pace compared to 2015. This is partially driven by lower investments in 2015/16, as the government has less cash to reimburse E&P companies.

Figure 2 shows global discovered offshore volumes split by region. Historically South America and Africa have been the continents with the largest discoveries. Brazil has been dominated by the large pre-salt discoveries, while Africa’s resources have been mainly from gas discoveries in Mozambique and Tanzania. In the period from 2008 to 2012, 20 billion boe was on average discovered per year. For 2013-2015 that number has been reduced to 9 billion boe. As of December 2015, the total discovered offshore resources for 2015 are estimated at 8.2 billion boe, consisting of around 70% gas. More than half of offshore resources discovered in 2015 were in Africa, mostly in Egypt and Mauritania, followed by North America (Mexico and United States). Eni’s giant gas discovery, Zohr, was by far the largest discovery this year, accounting for over 40% of total offshore discovered volumes. Kosmos Energy made two significant discoveries in Mauritania: Ahmeyim, the largest gas discovery offshore West Africa, in May 2015, and Marsouin in November. In June 2015, Pemex made a number of shallow water discoveries, including the 400 million bbl Cheek, offshore Campeche. The rising costs and the lower exploration performance have resulted in lower profitability for exploration over the past three years. The average discovery cost per boe for the years 2008-2012 was 2.5 USD/boe; this value surpassed 8 USD/boe in 2014. In 2015 around 50 BUSD was spent on offshore exploration, bringing the average global finding cost to ~6.2 USD/boe. 

After an observed 10% average annual increase in upstream spending from 2010 to 2014 (from 620 BUSD to 900 BUSD) E&P companies entered into an era of falling oil prices and squeezed cash flows.
Current investment forecast, as well as the forecasted spending from a year ago, can be seen in Figure 3. Rystad Energy now believes spending will be trending downwards during both 2015 and 2016, as companies try to balance cash flow in the low oil price environment. In 2015 the global investments are estimated to be 700 BUSD, down from 900 BUSD in 2014. Rystad Energy now expects 2015 investments to be 14% lower than the estimate one year ago. 2016 investments are expected to decline further to around 600 BUSD. The markets which are expected to be most affected by reduced investments are North America, Australia and Europe. Within Europe, spending for both Norway and UK is expected to drop ~30% in 2015 and over 10% in 2016. For 2015 the highest decline in investments is observed in North America in the unconventional supply segment of the oil market: shale/tight oil and oil sands projects. The decline in investments is expected to continue into 2016. However, Rystad Energy believes that oil prices will gradually increase in 2016/2017, and cash flows for the E&P industry will improve. Based on these drivers, the global investments are expected to start growing again in 2017/2018.


Conclusion

Global liquids supply growth slowed down in 2015 and investments have been significantly reduced. 2016 will be the year with even lower liquids additions as a result of reduced E&P activity. For the first time since 2013 demand is expected to grow faster than supply; this implies that the oil market is starting to balance. As a result of this, Rystad Energy expects oil prices to gradually recover in 2016/2017, which may lead to a beginning of a new investment cycle in 2017/2018.

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Article Contacts

Olga Kerimova, Analyst

Phone: +47 24 00 42 00

olga.kerimova@rystadenergy.com

 

Theodora Batoudaki, Analyst

Phone: +47 24 00 42 00

theodorab@rystadenergy.com

 

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 the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), Africa as well as South East Asia.