"Supply Gap” Signals Upstream Spending in Low-Price Environment

The fact that the oil and gas industry is facing its greatest challenge is no reason for investment in exploration and upstream development to be curtailed, a Wood Mackenzie report said. According to the report, further exploration is needed if the industry is to meet the world’s future needs.

The current crisis has pushed the development of renewable energy as an alternative means of energy, which to an extent is resistant to the price pitfalls of oil. Renewables are certainly likely to be the energy sources of the future and several major oils are investing into renewables, while setting targets for carbon neutrality. Despite this, renewables cannot yet meet the global energy and demand is growing.

“Whatever the pace of the energy transition, the world will still rely on oil and gas for much of its energy needs until well beyond 2040. Exploration will be critical to meet this future demand,” says the report.

Yet, with the COVID-19 crisis, oil companies around the world have slashed their budgets and cut expenditure as the oil outlook has worsened. This includes a MX$40.5 billion (US$1.81 billion) reduction in exploration and production budget by PEMEX for 2020, equivalent to 15 percent of the overall budget. 

The pandemic has pushed prices into negative territory as oil demand fell, economies closed and populations entered social distancing and lockdown measures. Though both WTI and Brent prices have risen to over US$40 per barrel and the Mexican crude mix hit US$37.35 per barrel on Thursday, this is still well below pre-pandemic prices. Companies have folded and thousands of jobs have been lost.

This is creating a pessimistic long-term view for exploration and upstream development spending for this year, which is 30 percent below the spending at the moment when negative pricing arrived.

Wood Mackenzie says “companies that are showing signs of fatigue with exploration are questioning their long-term commitment to upstream petroleum.” However, the consultancy firm points out that “only about half the supply needed for 2040 is guaranteed from fields already onstream. The rest requires new capital investment and is up for grabs.”

The report states that cumulative demand for oil and gas across the next 20 years will be 1,100 billion boe. Considering this, “640 billion boe can be met by proven developed supply from onstream fields,” but a minimum supply gap of 460 billion boe remains.

Yet, there is enough to cover this gap from existing discoveries that only need to be developed. But development implies cost and this is where companies may falter. Many of the current known deposits do not fit into the extreme cost-efficiency mold required for development and are likely to be left alone. Indeed, according to Rystad Energy, 282 billion boe in recoverable oil has been taken off the table for good.