- Prices would rise, capital discipline evolve and spending increase by 30% for the upstream sector to meet demand in a delayed energy transition scenario.
“As the risk of a delayed energy transition scenario increases,” says Wood Mackenzie’s latest Horizons report, “so does the possibility of a much greater pull on future oil & gas supply. But meeting this demand would require a significant increase in upstream investment, resulting in higher hydrocarbon prices and significant shifts in corporate strategy.”
According to the report “Taking the strain: how upstream could meet the demands of a delayed energy transition”, Woodmac postulates that a variety of external pressures have weakened government and corporate resolve to spend the estimated US$3.5 trillion required to restructure energy systems to limit both hydrocarbon demand and global warming.
Woods’ report had focused on the additional resources and spend required if the upstream sector was to meet higher-for-longer oil and gas demand, and the resultant consequences.
They argue that the world, under the current scenario, would require 5% more oil and gas supply and 30% higher annual upstream capital investment to meet the anticipated target. According to Woods, liquids demand would average 6 million b/d (6%) higher than its base case calculations to 2050, and gas demand would average 15 bcfd (3%) higher than the base case.
Fraser McKay, head of upstream analysis at Woods said: “Meeting rising demand in the near term in either the delayed scenario or the base case poses little challenge to the sector; plenty of supply is available.”
“However, stronger-for-longer demand growth is a much stiffer ask. A five-year transition delay would require incremental volumes equivalent to a new US Permian basin for oil and a Haynesville Shale or Australia for gas,” Angus Rodger, head of upstream analysis for Asia-Pacific and the Middle East also said.
Increased upstream investment is needed.
While it was Woods’ opinion that the global oil and gas sector could meet this demand through existing resources and future exploration, they have obviated the fact that significant investment would be required to achieve it. Estimating therefore that upstream spending would have to rise by 30%, resulting in US$659 billion of annual development spend versus US$507 billion in the base case, and US$17 trillion versus US$13 trillion in total to 2050 (all in 2024 terms). “Base Case” which in the opinion of Wood Mackenzie, means an assessment of the most likely outcome, corresponding to 2.5 ˚C warming by 2050, incorporating the evolution of current policies and technology advancement.
“We have calculated the sector’s cost elasticity by integrating our field-by-field annual supply models with our global supply-chain analysis,” says McKay. “This includes an assumption for continued operational efficiency improvements, which the industry could very well outperform, mitigating some of the inflationary impact.”
Increasing spend, Woods believe, won’t be easy, even if the signs of increased demand are present. Maintaining that more activity would put significant pressure on the supply chain – parts of which, as they have argued, were already running near capacity – even as project costs inflates.
“The industry’s current strict capital discipline edict,” says Rodger,” would also have to change or, at least, what defines discipline would have to evolve.”
“Corporate planning prices would increase if the outlook for the market improved, with increased confidence in demand longevity. In that environment, higher development unit costs and breakevens would likely be tolerable,” McKay said.
On price escalation, they posited that with the higher cost of supply, so too would come higher prices for both oil and gas. Woods’ Oil Supply Model forecasts a Brent price rising to over US$100/bbl during the 2030s in a delayed transition scenario. This is with the expectation of a fall towards US$90/bbl by 2050, averaging around US$20/bbl higher than our base case over the period (all in 2024 terms).
And a delayed energy transition scenario, by Woods definition, means a five-year delay, presumably, to global decarbonisation efforts, resulting from the ongoing geopolitical barriers, reduced policy support for new technologies and cost headwinds.
Knitted by Ejekwu