Wood Mackenzie has forecasted that global oil and gas development spend needs to increase by around 20 percent to meet future demand growth and ensure companies sustain production throughout the next decade.
Malcolm Dickson, director, upstream oil and gas, said, “Companies will need to start investing again to sustain their business. But decision-making will be fraught with uncertainties, the oil price and energy transition not least among them.”
Wood Mackenzie’s research shows the recovery is much slower and shallower than in previous cycles. Development spend will increase 5 percent this year, after a 2 percent rise on 2017.
Investment is set to rise from a low of $460 billion in 2016 to just over $500 billion in the early 2020s — far below the $750 billion peak in 2014.
Tom Ellacott, senior vice president, corporate research, said, “Four years of deep capital rationing have had a severe impact on resource renewal, especially in the conventional sector.
“Companies are rightly cherry-picking the best conventional projects in their portfolios for greenfield development. But not enough new high-quality projects are entering the funnel to replace those that have left.”
As a result, conventional growth inventories have shrunk during the downturn.
Global pre-FID conventional reserves now only cover two years of global oil and gas production. While there is a new wave of big LNG projects coming, investment in conventional, deepwater U.S. shale gas and oil sands will be well below pre-downturn levels.
Only U.S. tight oil is set for consistent investment growth over the next few years, driven by the Permian.
The result is a corporate sector divided in two: the U.S. tight oil “haves” with a strong outlook for investment and growth, and the “have nots” — the majority of which face a looming production challenge next decade.
What’s needed to kick-start a new investment cycle?
Wood Mackenzie’s research calculates that annual development spend will need to increase to around $600 billion to meet future demand for oil and gas through the next decade.
“Many companies will justifiably be concerned about committing substantial capital to long-term projects with peak oil demand and energy transition risks within the investment horizon,” Ellacott said. “There’s also a prevailing mindset of austerity designed to appease shareholders; investment is lower in the pecking order for surplus cash flow than dividends and buybacks.”
Wood Mackenzie expects strict capital discipline to continue to frame investment decisions, at least in the near-term.
This will favor short-cycle, higher-return opportunities.
The performance of U.S. tight oil will be critical. U.S. tight oil spend is forecast to peak in 2023 at a level 20-percent higher than in 2014. Out-performance in the Permian could drive upside to this figure.
But there are also downside risks that will need to be carefully managed to ensure tight oil does not fall short of expectations. Bigger and better conventional projects will ultimately be required.
For more information, visit www. woodmac.com or call (713) 470-1600.
