Insufficient production investment expenditure in the oil industry to balance supply and demand
2023/8/30
At least this is the view of Wood Mac analysts, who recently reported that the oil and gas industry is currently in the third year of an upward cycle, with new production investment of $490 billion this year. This will be significantly higher than the low point of $370 billion in 2020.
Wood McKenzie's analysts pointed out in an interview that although relying solely on their own expenses is not enough to ensure supply, cost reduction will make up for this difference. They have noticed the rise of shale oil in the United States and other non OPEC producing countries, and predict that non OPEC producing countries will maintain stable market share in the coming years.
In fact, this coincides with the report of US oil industry executives in the latest financial reporting season. Basically, what they are saying is that the oil well produces more oil than expected, thereby increasing the total production. The reason for the increase in oil well production is due to technological advancements.
Earlier this month, Pioneer Natural Resources reported that since the beginning of this year, oil well productivity has been significantly higher than the average level in 2022. However, at the same time, Bloomberg recently cited research from Enverus indicating that the extraction rate of shale wells is faster than previously assumed, and as shale fields mature, there are almost no undeveloped reservoirs.
In addition to oil from the United States, there are also smaller producing countries such as Canada, Mexico, Brazil, and Guyana. These have all made significant contributions to global supply, but OPEC still holds the largest share in the oil pool due to its common supply control policies.
More importantly, with the expansion of the BRICS group, we have obtained another group composed of the world's largest producing countries, partially overlapping with OPEC, but also including Brazil and Argentina.
Leaving aside the group, despite the push for transformation, global investment in new oil and gas supply is indeed increasing. Goldman Sachs reported last month that there are currently 70 large oil and gas projects under development worldwide. This is a 25% increase compared to 2020, although 2020 is hardly considered a normal year for investment decisions in any industry other than the IT industry.
According to this investment bank, a 7-year underinvestment will lead to a sharp decline in the resource lifespan of future projects and the lifespan of oil fields that have already been put into operation. As investment rebounds, this situation may change. On the other hand, Wood Mac warns that demand will peak and drive fundamental changes in the oil and gas industry.
According to Fraser McKay and Ian Thom, upstream analysts, this cycle will not end in a foam like the previous cycle. The reason is the prospect of peak oil demand caused by the transition to non hydrocarbon energy. They believe that this prospect will keep oil and gas producers vigilant and strictly adhere to their financial discipline in the longer term.
However, although demand may peak, even analysts at Wood Mac are concerned about the lack of backup capacity buffer, which focuses on spending and efficiency while adapting to a transforming world.
McKay and Thom stated, "We believe that companies are pursuing profit margins, not market share; upstream supply chain capacity will slowly grow, not leap growth, which is a traditional response in the upward cycle. This restriction may lead to supply chains being more stretched than the industry is adapting to.
Although many forecasters are discussing or even publicly calling for a peak in oil demand, currently, the peak in oil demand is still in sight, while the actual demand for oil has repeatedly reached new highs. Even the International Energy Agency (IEA), which advocates for energy transformation and predicts peak oil demand, has stated that demand will increase in the short term, reaching a historic high of 102 million barrels per day this year.
This may make the global supply and demand balance more unstable than predicted by Wood Mac's analysis. Although technological progress has indeed played an important role in maintaining high production and reducing costs, American shale oil miners have shed the previous setting of "growing at all costs".
At the same time, OPEC has imposed restrictions on the production of individual member countries - Saudi Arabia - and as long as they decide, they can reduce additional production to drive up oil prices.
Despite the push for transformation, the oil and gas industry is still increasing its investment in new production. This means that the expected peak oil demand is a relatively distant prospect. If the transformation begins to show signs of weakness under the risk of significant cost increases and raw material shortages, then the peak demand may even become even more distant.
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