Flagging levels of capital expenditure in the global oil and gas industry have caused concerns around not being able to meet future oil demand, but a variety of analyses show these fears are unfounded.
Capital investment in the global upstream sector is expected to reach US$580 billion in 2023, slightly above the annual average of US$521 billion from between 2015 and 2022, after the peak of nearly US$900 billion in 2014.
The International Energy Agency (IEA) has dismissed industry fears of underinvestment in oil and gas, saying these views were no longer based on the latest technology and market trends.
The IEA added: “At the same time, they underline the economic and financial risks of major new oil and gas projects, on top of their risks for climate change.”
Research consultancy Rystad Energy said that claims of underinvestment in the global oil and gas industry were overblown, with the industry’s enhanced efficiency – driven by lower unit prices, improved productivity, and efficiency gains – and evolving portfolio strategies boosting the upstream sector.
Rystad explained the industry could do the same as before, but at a much lower cost – while investments have contracted, activity and production remained robust and comparable to levels observed between 2010 and 2014.
The consultancy predicted investment would look “flattish” over the next two or three years and may start to drop in 2026, a result of electric vehicle adoption and government emissions policies flattening oil demand.
Rystad Head of Upstream Research Espen Erlingsen said that contrary to popular opinion, the world was investing appropriate amounts of money in fossil fuel production to satisfy demand.
He said: “Cost savings means operators can produce the same amount of oil at a lower cost, and we don’t foresee an oil supply crisis due to underinvestment on the immediate horizon.
“By looking at how unit prices for different supply segments have developed since 2014, we see how costs have fallen.
“For most segments, prices have come down by 20 to 30 per cent, resulting in more activity for every dollar spent – therefore, it would be misleading to only look at the falling investment trend.
“New resources will exceed total production annually until at least 2025, demonstrating the positive trajectory of the global oil industry and supporting our conclusion that an underinvestment triggered supply shortage is unlikely in the short term.”
The IEA has forecast oil use going into decline after 2026 in its Oil 2023 medium-term market report, but overall consumption to be supported by strong petrochemicals demand.
Based on current government policies and market trends, the report estimated global oil demand would rise by 6 per cent between 2022 and 2028 to reach 105.7 million barrels a day, supported by robust demand from the petrochemical and aviation sectors.
Despite this cumulative increase, annual demand growth is expected to shrink from 2.4 million barrels a day in 2023 to just 0.4 million barrels in 2028, “putting a peak in demand in sight”.
In particular, the use of oil for transport fuels is set to go into decline after 2026 as the expansion of electric vehicles, the growth of biofuels, and improving fuel economy reduce consumption.
IEA Executive Director Fatih Birol said: “The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency and other technologies advance.
“Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition.”
As an example of the shifting appetite for investment, the Saudi Arabian government in late January ordered Saudi state oil company Aramco to halt its oil expansion plans and target maximum sustained production capacity of 12 million barrels a day, a million barrels below a target announced in 2020 and set to be reached in 2027.
RBC Capital Markets said it expected Aramco’s capex budget could be lowered by about US$5 billion a year over the coming years, relative to the prior guidance, and projects without final investment decisions – such as the 700,000-barrel-per-day Safaniya project – were likely to be deferred.
Aramco’s previously forecast capital expenditure for 2023 was US$45-$55 billion, the highest in its history.
The reason for the U-turn on oil capacity expansion plans was due to the energy transition, according to the Kingdom’s Energy Minister Prince Abdulaziz bin Salman, who said that Aramco had other investments to make in areas including gas, petrochemicals and renewables.
He added that the Kingdom had a huge cushion of spare oil capacity in case of major disruptions to global supplies caused by conflict or natural disasters, estimated to be about three million barrels.
Wood Mackenzie has also supported the view that spending and supply would recover to meet demand, as opposed to an inevitable supply crunch due to underinvestment, and go on to meet oil demand through its peak and beyond.
The primary reasons for this are the development of giant low-cost oil resources, relentless capital discipline, and a transformational improvement in investment efficiency.
Contrary to the widespread view of sector-wide underinvestment, Wood Mackenzie’s analysis suggests that current annual spend on asset development of around US$500 billion in 2023 terms – half the level of a decade ago – is sufficient to meet peak demand under most realistic demand forecasts.
Wood Mackenzie said: “Most of the industry’s oil and gas investment for the rest of this decade will target advantaged resources: those with the lowest cost, lowest emissions and least risk.
“Beyond this decade, the growth potential of these prime, existing advantaged opportunities will be exhausted – new supply will inevitably become more expensive to develop.
“To meet demand, the industry will depend increasingly on late-life reserves growth from legacy supply sources, higher-cost greenfield developments and as yet undiscovered volumes.”
