Efficiency gains, capital discipline and low-cost oil will keep a lid on spending requirements out to peak oil demand of 108 million b/d in early 2030s.
Despite concerns about underinvestment in upstream, peak oil and gas demand can be met in the 2030s without a substantial increase to current annual investment levels of US$500 billion, according to a new Horizons report from Wood Mackenzie.
“Enough is Enough: Debunking the Myth of Upstream Investment” report further states current upstream spending will be a little more than half of the US$914 billion 2014 peak (in 2023 terms), allaying fears of a widespread belief by a recent shortfall that the industry was underinvesting and that a supply crunch was inevitable, sooner or later.
“This was never Wood Mackenzie’s opinion” says Fraser McKay, Head of Upstream Analysis at Woods. “Our long-held view has been that spending and supply would rise to meet recovering demand and that the upstream industry would not and could not reprise the ignominious years of ‘peak inefficiency’ during the early 2010s.”
Woods also predicts that, with oil demand bouncing back from pandemic lows, it will eclipse pre-pandemic highs in 2023. Adding that oil demand growth will slow from 2024, reaching a peak of 108 million barrels per day (b/d) in the early 2030s.
The team were of the view that spend levels not much higher than the current run-rate is also likely to deliver the supply needed to meet demand through to its peak and beyond. Three main reasons were adduced: the development of giant low-cost oil resources, relentless capital discipline and a transformational improvement in investment efficiency.
The report points at adversity as the primary catalyst for a structural change in supply efficiency, noting that the price shocks of 2015-2016 and 2020-2021 forced the industry to become far more disciplined with its capital.
“Conventional greenfield unit development costs have been slashed by 60% in 2023 terms” says McKay, adding “and US tight oil wells generate nearly three times more production today for the same unit of capital than in 2014. New technology, capital efficiency and modularization have been leveraged to powerful effect.”
Most of the industry’s oil and gas investment for the rest of this decade according to the report, will target advantaged resources – those with the lowest cost, lowest emissions and least risk. “But beyond that, new supply will become more expensive to develop.” And to meet demand, the team believe the industry must depend increasingly on late-life reserves growth from legacy supply sources, higher-cost greenfield developments and as yet undiscovered volumes.
“Counterintuitively, the half-a-trillion run rate will need to be maintained beyond peak demand”, McKay said.
Although there are alternative demand scenarios, the report identifies each with its vastly different implications for future upstream investment, pointing out certain associated risks to the required investment upward trajectory, even as efficiency and investment are expected to evolve, with the ‘required’ equilibrium unlikely to play out.
Wood Mackenzie’s base-case Energy Transition Outlook clearly shows an equivalence to a 2.5 °C pathway, “but even in our Accelerated Energy Transition outlook for a 1.5 °C trajectory, substantial investment is still required.” Wood Mackenzie calculates nearly US$400 billion per year would be required in the 2020s and nearly US$250 billion a year in the 2030s (in 2023 terms).
They were also of the view that the impacts of underinvestment would be far-reaching, with consequences for the global economy although, and according to them also, sustained investment imbalances are unlikely to persist.
“This cycle is certainly different”, concludes McKay. “Energy transition uncertainty adds a new layer of complexity and risk for upstream investors. But the oil market is literally and metaphorically liquid. Price signals, reinvestment rates and the actions of OPEC+ eventually bring demand and supply back into balance”.
