The looming oil supply challenge with Artem Abramov

A warm welcome to everyone who's joined us for the very first episode of Let's Talk Energy, a new weekly podcast from Rystad Energy. I'm your host, Noah Brenner. I've been covering the evolution of energy for the past 20 years. Each episode, I'll sit down with Rystad Energy experts or a special guest to unpack the most exciting developments in the energy world. Expect a conversation that you can understand, even if you're not an expert. But we're also not going to shy away from getting into those all-important details. Like Rystad Energy, we're going to cover a wide range of energy issues, so anything from oil production, which we'll be talking about in today's episode, to power demand, to market moving geopolitics. I'm excited to have you all with us, so let's go ahead and get started. Now, we've seen a tangible shift by companies and governments over the last few years from leaning into the energy transition to really re-emphasizing oil and gas production, whether that's for energy security or energy affordability, or simply that's where they see their own competitive advantage. That's put the spotlight once again on the oil industry's ability to replace the reserves that we use each year. But it's one thing to say that you want to boost reserves and eventually production, but it's another thing to actually do it. So are all the catch phrases, drill baby drill, and the cash actually putting more barrels in the bank of global oil reserves, and eventually gas and artank. I've got Artem Abramoff, our deputy head of analysis, joining me today from Oslo, who is perfectly placed to tell us just that. Artem, welcome. Yes, hi Noah, and thank you for having me here today. Well, let's talk energy. Now, Artem, I couldn't help but notice that that path that I've described the world being on actually reflects your career here at Rystad Energy quite a bit. Yeah, it's a fair statement. I think I started a trusted energy as a shale analyst. Actually, I was looking for many years at North American oil and gas, and that's really my key area of expertise. And then around the COVID period, I got really interested in energy transition. All the clean technologies, things like hydrogen, carbon capture, biofuels. And I was overseeing our new energy research in the last few years. And now, things are changing again. I'm actually moving back to oil and gas. So I will be leading our global oil and gas research from this fall. So effectively, it is a little bit of my personal energy transition, which is to some extent a representative of some other changes we've seen in the industries as well. Like I said, do the perfect person do explain all this to us? So I want to mention that we've got our annual global oil reserves white paper is out for our clients. We're not going to spend too much time on that. There's a link in the show notes where everyone can read it. But briefly, let's touch on our headline figure that the world has about 1.5 trillion barrels of recoverable oil reserves. And so, Artem, how does that compare to last year? And what's changed? And why? Yeah, so we publish our annual resource report every year. And we monitor the changes trying to understand where the world is heading to. And one of the main questions basically we are trying to answer is, do we have enough oil in the ground? Or maybe to put it more accurately, do we have enough oil that can be recovered economically to support most realistic demand projections going forward? And this year, I think we saw some positive developments in the last 12 months. I think there were some upward revisions coming from West Texas, also from Argentina, Vacamertasheil. So the number went a little bit up. But our main message, I would probably say, they're still quite comparable to what we communicated last year is that at the current levels of exploration activity globally, we might run into very serious challenges 10, 15 years down the road, because we are not finding enough oil to support, let's say, more conservative energy transition scenarios, to support the scenarios with more ambitious oil consumption in long term. So let's talk more about that. You had a post on LinkedIn. You're pointing out that there are really two schools of thought when it comes to future oil supplies, and whether or not we need another oil and gas development super cycle. Now, one school of thought basically suggests that reserve replacement is a serious challenge for the industry. We'll face the consequences in the 2030s, especially if, as you said, oil demand remains resilient and the transition progresses at a pace that's maybe slower than we anticipated just a few years ago? The opposite view, which maybe we've seen reflected in the commodity price performance over the past few years is essentially we've got US shale inventory, we've got OPEX spare capacity, we've got improving recovery factors out of various fields, and demand has also proven to be more malleable, more responsive to higher prices, and so we're just fine. And there's no need for this kind of conventional upcycle or super cycle you've talked about. Now, I think I may know the answer to this, I mean, which school do you subscribe to if you need to pick one or the other? Honestly, I'm quite convinced that we will see another super cycle in this industry and maybe not a single one. Because yes, five, six years ago, you know, at the onset of COVID-19 pandemic, the views of accelerated energy transition, they really became very popular. Like we thought that we could electrify everything out there really fast. We thought that electr񩣠vehicles would penetrate global fleet extremely quickly. But today, we still have maybe only a couple of examples globally, like Norrie, where this rapid transition actually happened. On the other side, we have a lot of large European car markets we have the US where electric vehicle penetration faced, you know, certain obstacles. And we could discuss, you know, for a very long time, what really caused this, you know, slow down in the adoption. There were some infrastructure, boton X, supply chain, boton X, cost of EVs and not falling as quickly as we hope, but we just have to acknowledge that it takes a longer time to actually adopt some of these technologies and see the full impact of energy transition. So today, quite many people, including ourselves, I think we have more, maybe, constructive and more conservative views on how quickly or demand would slow down in the next 20, 30 years. And if you take this observation as an assumption into your future modeling, you would quickly end up with the conclusion that we are not discovering enough oil, exploration activity has been very, very low since 2015, 2016. Resurre for placement ratios, they are at a very low level, but definitely less than 100% doesn't matter how I look at it. And yes, the US shale industry, you know, drove a lot of optimism, a lot of people felt that US shale became a new, pretty much unlimited source of oil going forward, but even shale companies, they are now heating some limits on how much oil, how many basically new wells they can drill at relatively low oil prices. You know, if you go back to the environment, where we were in 2014, when oil prices were above $100 per barrel, yes, we have just such unprecedented potential in many parts of the world, but this potential has to be proven. It has to be discovered and it will take time to, you know, prove all these tier three, tier four locations. And we are not there yet, and that's why I believe that we will need another upcycle, very high oil prices in order to trigger additional activity and deliver on the demand projections. - Well, so I definitely wanted to talk more about some of these thoughts on US shale in just a second, but I do want to make sure that we touch on something that you just hit on here, which is price. I mean, that's probably the thing that most people, both inside the industry and outside the industry, really care about. And so, you know, if all these reserves aren't necessarily available to us at today's prices, what price might we need to see in the future to secure additional supply, to secure the necessary supply? - Yeah, well, first of all, I think it's quite important also to differentiate between short term requirements from prices and things which really need, you know, in 20, 30, 20, 40s on a much longer term perspective. And so let's talk short term and then let's talk long term. - In short term, of course, there are reasons by oil prices where they are. The market is pretty well supplied, you know, and we have so many new oil, which is coming to the market now in 2025 and there is, you know, pipeline of additional projects, which will become operational in 1926, whereas demand growth globally has been quite disappointing. In, on top of that, we have OpenPlus. With very significant spare capacity, they've been regulating the markets artificially to some extent since 2015. And there are different estimates, but I think everyone would agree that the volumes which they can bring to the market within a fairly short time frame, if they won't, are quite significant. So short term story remains, I think, quite consistent is that there is a reason why we have seen this downward pressure on oil prices and we don't see, we don't need oil prices to go much above, let's say 70 dollar per barrel, to see balanced oil markets in the next three, four, maybe five years. But as you move to the next decade, then you are really running, you're running, OpenPlus is kind of running out of fuel. They, even in countries like Saudi Arabia, UAE, they will need to increase the spending, they will need to increase oil fuel activity, in order to achieve additional production growth in order to boost their production capacity. And in the regions like the US, like North American Shale, I would probably say we'll need to have sustainable oil prices above 80 dollars per barrel, in order to see US oil production growing for many, many years gradually. Once you get to this 80, 90, 100 dollars per barrel range, theoretical potential of the US Shale becomes truly unlimited. Or to put it differently, we don't know for sure, like no one knows for sure how many locations in tier three, tier four, Shale place are commercial if you really get to sustain about 100 dollar per barrel price environment. There are just so many basins where we haven't seen any meaningful activity since 2014. No one was interested in these basins and now we just have access to much better technology to actually try these areas. - So if I'm understanding you correctly, we might need an oil price that's certainly higher than it is today to incentivize additional production, say five years down the road, but it might not be the 150 or $200 per barrel that we've seen predicted in investment. Thanks super cycle notes of years past. - Yeah, I think it's always, there is always a risk of making such projections in public domain because people would remember it. I would never say that I expect oil prices to get to 150 dollars per barrel, even five, 10 years down the road and stator, but I won't exclude, I don't exclude the possibility that we will see market shocks of such magnitude as a result of the decisions, which we didn't make in last four half years because a lot of companies, they were really reducing exploration, they're reducing their focus on exploration, buying into the story that energy transition would accelerate. And now we're seeing this shift, we are going back to the views that it would actually take longer to see the full impact of the transition. - So let's dive in on US shale, because as you said, there are probably more wild cards, more unknowns with shale, and it's certainly been the portion of the industry that has most surprised us probably over the past decade and changed the overall market dynamics. And so you're talking about, say those two, three, four potential locations, the potential for shale to grow, but will we see the same, could we see? Does it have the capacity for the same rapid growth that we saw kind of in the early shale days when it was adding potentially a million barrels a day per year or more? I think it has capacity to get to the same growth rate, but it requires a combination of factors. It requires both very stable and high commodity price environments. So we need to get to, I would say, maybe $100 per barrel plus, if we want to see shale growth of one million barrels a day magnitude per year. And even if we get there, let's say we get there tomorrow, I don't think the companies will rush, you know, changing their capital programs immediately, simply because the business model in this sector has actually changed quite dramatically, you know, the production in the US is really controlled by publicly listed companies and the investor community remains conservative, to some extent. And they prefer, they would like these companies to prioritize capital discipline and they want to see fairly, you know, competitive cash returns. This has been really the main focus in this industry, the main focus of the investor community since 2020. And it will take some time to see significant changes in this attitude. But commodity price cycle in itself will be needed as a signal for the investor community. Like if we get to $100 per barrel and if we stay there, the investors around the world, they will start realizing that something has changed fundamentally, that way they are not producing enough oil. So that will be very important market signal. And 12, maybe 24 miles down the road, you will start seeing some shifts, you will start seeing companies kind of opening up a little bit in terms of their capital budgets and they will start increasing activity and increased production will be an implication of that. And I wanted to stick with that corporate strategy theme here for just a second in terms of, I mean, many not just Western firms that are listed on stock exchanges and have an investor base that's looking for returns as well. I mean, many national oil companies now are publicly listed. And so how do you see national oil company strategy playing into some of these trends around reserve replacement as well? Would you expect kind of the same perhaps conservativism around spending that we've seen from some of the public players, from some of these national companies? Yeah, I think it varies. Like the business model, among national oil companies varies quite a lot, from country to country. Of course, we have examples of Ecuador, which is a very special case and Ecuador in terms of the business model is much closer maybe to majors, like Exxonmobile, Chevron or Shell or BP. And then you have national oil companies in the Middle East or Southeast Asia, which tend to have very different business model. Like their main objective, main objective for these companies is not necessarily to maximize value creation for the investors. It could be something different. It could be something in the area of energy security. It could be something in the area of fiscal revenue, which is of course, very important driver, but they're not always obliged to make project decisions on the basis of traditional kind of market philosophy. So that's where you have the big difference. But in general, I would definitely say that national oil companies, they managed to navigate through the last cycle very successfully, because they did not experience that much pressure from the investor community on the energy transition site. And they maintained a little bit more traditional philosophy. So this strategy was a little bit more resilient, and that helped them to avoid rapid changes in their strategy, which was not always appreciated by the investor community. Or if you look again at European and American leaders. Now, I want to pop back into Shale, because I feel like there's a few more questions there we need to explore in particularly around wild cards. I mean, what is it that could potentially surprise us to the upside or the downside? Is there potentially technology or are there things that could make Shale even more of a wild card, perhaps, in an already yes? Yeah, so let's maybe talk about the technology first, because it's really, I'm fascinated by the progress this industry is making every year. It's not a new sector. It's already been more than 25 years since George Mitchell has proven that Shale gas can be extracted in economic manner, in a barnet shale. And still, every year, we are seeing longer and longer vows, we are seeing more and more intensive completions, and we have seen some major technological breakthroughs, which were perceived as a complete science fiction just five, seven years ago. There is a very long list of water operators and I'll try to do in sometimes adopting as a standard completion design. I don't know if you heard about this. You turn vows in the next two. Yeah, so horseshoe wells. Incredible. So I still remember, I think it was 2018 or 19, when Shale drew the first such well in Delaware Basin, and it was really all over all scientific publications. It was a pilot project at that stage. And now, these vows actually quite common in both Midland Basin and also in Delaware Basin. Several operators, they are actively completing them. And the entire goal is a complex design, like it's difficult to drill it, a U-shaped well horizontally. But ultimately, it is all about costs. This design allows you to reduce your drilling and completion costs compared to the situation where you need to drill to adjacent vows, just because you need only one vertical section. That's pretty much the own advantage. And whatever helps you to reduce the costs, well, it's extremely popular among your investors this day, since we already discussed. So all these small technological advancements, they're still happening, and industries becoming more and more efficient every year. And I think we'll all still be surprised by what kind of efficiency gains we're yet to see from North American land sector. So I've got just one more question around Shale, and that is to this point, it's been a US story. But will that continue into the future? You mentioned the Bakumartha Shale play in Argentina at the top of the episode. We've also seen renewed Shale exploration and development in the Middle East and beginning in North Africa as well. And so are these plays outside of North America becoming material to our projections for future? Will supply? Yeah, I guess you said the US, it has been largely the story, but I feel obliged to correct you a little bit because our Canadian viewers might be a little bit offended. And North America's story. Yes, because we shouldn't forget that in Canada, in the deep basin, this is the area where we have seen some of the most impressive Shale gas results historically. So yes, it has been North American story, Bakumartha in Argentina is definitely another hot spot for Shale activity. And you know, it is still from a certain point of view, it is early days. Well, the activity in Bakumartha, there was some activity already for like 10, 12 years, but every year the walls are getting more and more productive, more and more economic. And they're like maybe three to four, five years behind typical best practices which we see in the US. So there is still a lot of upset in terms of what we can see. And commercial potential there is proven. Bakumartha is already the most significant driver of oil and gas production in Argentina. And then you have many other places where in theory you have significant Shale potential. You have Australia, you have Middle East, you have some pretty interesting Shale resources in Eastern Europe. There are some parts of Latin America in addition to Argentina, but Shale potential is significant. Ego for Shale doesn't stop at Mexican border, it actually extends into Mexico. So you have some opportunities there. In all these areas, sometimes, Georgie, from a pure geological point of view, things don't look as impressive as in the best place in the US. So to some extent, in North America, the industry was lucky to get access to all sweet spots. But still, it is not that bad. Like it can be as technologies kind of get better and better. Shale can become economic in all these regions which I just mentioned. And we have seen a lot of attempts, a lot of exploration, especially in the Middle East and also in Australia. And in some countries, Shale activity faces certain regulatory obstacles. But in the areas where you don't have these obstacles, I'm actually quite optimistic about how significant and conventional can become 10, 15 years down the road. And so I want to make sure that we've got time here to talk about a whole other part of the industry that's huge is the conventional side of things. And certainly, Shale is not the only supply factor. How does conventional supply, particularly that of OPEC members, major non-OPEC producers like Brazil? Where does that play into this? I think we are now in a very, again, it brings us back a little bit to short-term market dynamics, but right now we are in the situation where you are getting some growth of oil production from everywhere in the world. So, and either these countries are increasing production like Brazil, for example. There are some new projects which are coming online. No, we have Guyana as well. Or you have several members of OPEC+ coalition which have a potential to increase production significantly. So, bear in this oversupplied market situation. And getting back, basically, to your question, there is a lot of potential to see accelerated conventional supply. And, we are talking both about own-shore operations and also offshore, deep water, shelf activities, you know, we just got the new generation of large projects coming in Gulf of Mexico. That was the discovery, actually, just a few weeks ago in Poland, which is apparently the largest oil field discovered in Europe since 2011-2013 period, which is quite impressive in the boutique sea, but of course, it's still a little bit speculative in terms of how quickly it will be developed. But there are, the news flow has been very, very significant. We're seeing a lot of discoveries, a lot of exceptional execution like the projects have been brought online, fully in line with operator communication without any delays. This is like becoming a common trend everywhere in the boat. And that is one of the reasons why I'm personally talking more and more about the new super cycle in the industry these days. And so, but I want to ask, I mean, you highlighted that we've had poor exploration success over that the trend has been for poor exploration success. And honestly, the trend in development, say, until the past 12 to 18 months as you highlighted, has actually been of lower reserves being brought into production. But over the past roughly 12 months, we have seen this, about 50% more oil reserves brought into production, I think you highlighted. And so, are we seeing the fruits of AI and digitalization and some of the technology advancements to think that this could be the new normal, that higher exploration success, that better project execution is actually going to be kind of the new baseline moving forward? I definitely think that we already seen clear evidence that the amount of resources were put in production every year, which was so in the last 12 months, could become a new normal. So, as you said, it increased by around 50%. We are still largely leveraging on a very large backlog of resources which we discovered in the last 15, 20 years. exploration activity itself apart from selected examples, which I mentioned, still is still relatively limited. So, we will need to increase it significantly if you want to avoid, supply deficit in 2030s. But this hasn't happened yet. And then in terms of the impact which AI and technology advancement can make, well, I really think about AI as just a boost to natural technological luring curve in this industry because something new, the industry kind of keeps innovating. And even before we saw the emergence of AI every year, we've seen some efficiency gains, there were some new tools available to the industry to boost exploration success. Now AI will accelerate the luring curve. And we already seen it in some aspects of the industry. The research operations have become more efficient, modeling tools have become more efficient, and naturally all these will result in efficiency gains also further downstream within the value chain. So, if I'm understanding you're at RTM, perhaps we've taken a step up when it comes to project execution, but we've still got some steps up to take when it comes to exploration. If we're going to be discovering those reserves that we need to bring forward finally into production. Absolutely. Yeah. Now, I would love to speak with you. I could talk for hours on this subject, obviously, but I do want to be mindful of time here. Is there anything that we've missed? What haven't we talked about that's keeping you up at night? Well, we didn't touch on one very important topic is a geopolitical environment because of course, in the oil industry, everything you could say about future demand and supply outlooks is very sensitive to your assumption on the world we believe in going forward. And this industry has a tendency to experience significant shocks as a result of various sanctions, trade restrictions, and policy shifts. And of course, this is another big area which might impact all the projections which I mentioned today. That sounds like an excellent topic for a future. Let's talk energy episode. RTM, thank you so much for joining us. Thank you, Noah. So, just to recap what we've heard today. The world has plenty of oil, but not necessarily as much oil as we need at today's prices. And so prices may need to rise to incentivize the supply that we need into the mid-2030s and beyond. The industry has made good advances when it comes to bringing projects through execution and into production, but there's still more work to be done in exploration to make sure that we're finding those new reservoirs that we'll need. And, as always, shale could be the wild card here that could surprise perhaps to the upside, perhaps to the downside, but it also could move from North America through to other parts of the world. Thanks for listening to Let's Talk Energy. This podcast is a Rystead Energy production produced by Laura Rodriguez-Scogh and Butter Oak. Check out the show notes for further analysis on the topics we've discussed in this episode and connect with us on social media at Rystead Energy on all your major platforms, or you can check us out on the website. If you'd like to send us a question or reflect on today's show, email us directly. It's podcast@rysteadenergy.com. Please leave us a review and hit that subscribe button while you're there. And, most importantly, don't forget to join us next week.