Investment in Oil and Gas Needs to Increase by Twenty Percent
Wood Mackenzie forecasts that global oil and gas development spend needs to increase by around 20 percent to meet future demand growth and ensure companies sustain production next decade. However, decision-making will be fraught with uncertainties about oil prices and the energy transition.
Wood Mackenzie’s research shows that development spending will increase five percent this year, after a two percent rise on 2017. Investment is expected to rise from $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.
Wood Mackenzie calculates that annual development spend will need to increase to around $600 billion to meet future demand for oil and gas through next decade. But Ellacott does not expect a rush to re-invest.
“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,” he 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 buy-backs.”
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. Exploration success will be a crucial factor in replenishing depleted conventional inventories. However, exploration budgets were slashed 60 percent during the downturn and have yet to recover.