The Impact of low Oil on Exploration

Could 70-Year Low Signal Supply Shortfall Ahead?

September 1, 2016

The current “oversupply“ of oil is a result of new technologies in extraction from existing fields but this is likely a short-term phenomena . Explorers in 2015 discovered only about a tenth as much oil as they have annually on average since 1960. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand.

This has been compounded by full-throttle output from Russia and OPEC, which have flooded the world with oil despite depressed prices as they defend market share. But years of under-investment will be felt as soon as 2025. At current rates, producers will replace a little more than one in 20 of the barrels consumed this year.

We have seen several outcomes since oil prices have fallen by more than half since the price collapse two years ago. 1) Drillers have cut their exploration budgets to the bone. The result: Just 2.7 billion barrels of new supply was discovered in 2015, the smallest amount since 1947, according to figures from Edinburgh-based consulting firm Wood Mackenzie Ltd. This year, drillers found just 736 million barrels of conventional crude as of the end of last month. 2) Rig count in the US has dropped significantly leaving many wells idle and equipment on the sideline.

That’s a concern for the industry at a time when the U.S. Energy Information Administration estimates that global oil demand will grow from 94.8 million barrels a day this year to 105.3 million barrels in 2026. While the U.S. shale boom could potentially make up the difference, prices locked in below $50 a barrel have undercut any substantial growth there.

Global spending on exploration, from seismic studies to actual drilling, has been cut to $40 billion this year from about $100 billion in 2014. Exploration is easier to scratch than development investments because of shorter supplier-contract commitments. This year, it will make up about 13 percent of the industry’s spending, down from as much as 18 percent historically.

The result is less drilling, even as the market downturn has driven down the cost of operations. There were 209 wells drilled through August this year, down from 680 in 2015 and 1,167 in 2014, according to Wood Mackenzie. That compares with an annual average of 1,500 in data going back to 1960.

Oil prices at about $50 a barrel remain at less than half their 2014 peak, as a glut caused by the U.S. shale boom sent prices crashing. When the Organization of Petroleum Exporting Countries decided to continue pumping without limits in a Saudi-led strategy designed to increase its share of the market, U.S. production retreated to a two-year low.

Creating Opportunities

Oil companies will need to invest about $1 trillion a year to continue to meet demand, said Ben Van Beurden, the CEO of Royal Dutch Shell Plc, during a panel discussion at the Norway meeting. He sees demand rising by 1 million to 1.5 million barrels a day, with about 5 percent of supply lost to natural declines every year.

Oh CANADA…

Canada is the 5th largest producer of energy in the world, producing 6% of global energy supplies. Only Russia, the People’s Republic of China, U.S. and Saudia Arabia produce more total energy than Canada. In 2015, energy accounted for 7.2% of our country’s GDP.

The International Energy Agency (IEA) predicts that by 2040, the world will need 32% more energy than is currently being produced today. Yes, there will be alternative sources of energy that become viable, however, we believe that traditional energy assets will continue to play a role.

One more interesting factoid: According to StatsCan, in 2013 Canada used 25.3% less energy per dollar of GDP (gross domestic product) than in 1990. Perhaps Canadians are proving to be more thoughtful with regard to energy consumption and conservation?

Debra, and The Wooding Group


China’s Decline in Oil Production Echoes Globally