Global oil and gas development spend needs to increase by around 20 percent, to about $600 billion, to meet future demand growth and ensure companies sustain production next decade.
That’s according to Wood Mackenzie (WoodMac), which says development spend will increase five percent this year, after a two percent rise on 2017. WoodMac forecasts investment 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.
“Four years of deep capital rationing have had a severe impact on resource renewal, especially in the conventional sector,” Tom Ellacott, senior vice president of corporate research at WoodMac, said in a company statement.
“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,” he added.
WoodMac expects strict capital discipline to continue to frame investment decisions, at least in the near-term. The company said this will favour short-cycle, higher-return opportunities.
“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 stated.
“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,” he added.
Conventional growth inventories have shrunk during the downturn, WoodMac highlighted, stating that global pre-FID conventional reserves now only cover two years of global oil and gas production. The energy research and consultancy group stated that “bigger and better” conventional projects will ultimately be required and said exploration success will also be crucial to replenishing depleted conventional inventories.
WoodMac said investment in conventional, deepwater, U.S. shale gas and oil sands will be “well below” pre-downturn levels, with only U.S. tight oil “set for consistent investment growth over the next few years, driven by the Permian”.
Last month, in a statement posted on WoodMac’s website, WoodMac Chairman and Chief Analyst Simon Flowers warned that the industry isn’t finding enough oil.
“Guyana is one of the very few giant oil discoveries made during the downturn. Fact is, we need more Guyanas, a lot more, and we need them soon. Without them, the oil market is in danger of tightening in the not too distant future,” he stated.
WoodMac’s roots trace back to 1923. The company, which is a Verisk business, has locations all over the world.
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