Why a Coming Gap in the Supply of Oil Is Unlikely
Posted by hkarner - 17. November 2016
Source: The Wall Street Journal
Amy Myers Jaffe (@AmyJaffeenergy) is executive director of energy and sustainability at the University of California, Davis, Graduate School of Management. She was formerly the director of the Energy Forum at the James A. Baker III Institute for Public Policy at Rice University.
The oil industry and analysts alike have made a hullabaloo about how capital investment in new oil and gas fields has fallen sharply since oil prices collapsed in 2014. The latest theory about it, reminiscent of scarcity mongering during the run up in oil prices in the 2000s, is that the spending decline is so large it will create a dangerous gap in oil supply sometime between 2018 and 2020. The so-called supply hole thesis was bandied about widely at a recent gathering of senior oil and gas executives in London where the Saudi oil minister credited concerns about the gap to the kingdom’s willingness to cut its own oil supply now “to signal” other producers to pour more money into exploration and spending budgets now to ensure sufficient oil will be available in the 2020s. In Houston, belief in the 2018 supply hole is so strong, it is driving cash-starved shale-oil and gas firms to struggle to hang on and not offer their assets into the distressed debt market in the hopes that oil prices will turn back up before they have to close their doors.
The question is: Is the oil exploration/production (E&P) spending supply hole real or chimera? Data on the inefficiency of capital spending in the 2000s might suggest the latter is more likely. Many of the megaprojects into which the majors dumped so many billions of dollars of capital have not fully panned out, or they have faced major delays for first oil. The new “lean years” environment that is forcing the biggest oil companies to make sure every dollar of spending counts might be more productive, not less productive than the recent past when marginal projects, such as Shell’s $4 billion-plus of wasted capital in Alaska, were greenlighted, only to be axed as outlooks changed.
Citigroup research in its recent report “A Bumpy Road Ahead for Energy Markets” noted that recent cuts in oil and gas investment have been mostly in line with falling costs for exploration and production activities. The report notes that upward of 15 million barrels a day (b/d)of oil supply growth from non-OPEC countries – that is, countries other than those with membership in the Organization of the Petroleum Exporting Countries – will come from new or expansion projects in conventional fields, deep-water developments and to a lesser extent, heavy oil and oil sands projects already receiving the go-ahead to produce new oil between now and 2022. Russia has been a particular standout, with its recent production reaching 11.2 million b/d, up from 10.7 million b/d a year ago. Russia is typically cited as a place where natural geological decline rates require massive spending to reverse.
The current low oil-price environment is prompting the oil industry’s largest firms to focus more intently on extending existing fields closer to home in the U.S., and Canada and developing new finds in West Africa rather than taking on riskier, high-cost frontier mega-projects in far-flung places like the Arctic. That is likely to mean that investment dollars will stretch farther and lead to first oil production in shorter time horizons. There will be fewer chances for wasted capital than when the industry poured billions into the Russian Arctic, the Caspian Sea, Iran, Venezuela and Canadian oil sands, only to write down billions in abandoned efforts. Executives say money pouring into the Texas Permian Basin, for example, now favored by the oil patch, could eventually lead to large increases there, with some even predicting that a modest recovery in oil prices could allow the region to reach 5 million b/d, up over 3 million b/d from current output. Sources say its full potential is upwards of 10 million b/d.
No doubt continuing political troubles in places like Venezuela and Nigeria could continue to shave oil supply from those places and an escalation in such problems could bring about new shortfalls. But so far, other fellow OPEC members like Saudi Arabia and Iran have shown a willingness to grab such markets as they become apparent. If OPEC stays the course on this competition for markets, and the private oil sector spends more wisely as is now promised, the 2018 to 2020 supply hole may be hard to find.