The Oil Industry Needs Large New Discoveries, Very Soon

By Tsvetana Paraskova for Oilprice.com | October 1, 2018

Market participants and analysts are all focused on the imminent oil supply gap that is opening with the U.S. sanctions on Iran just five weeks away.

But beyond the shortest term, a larger and more alarming gap in global oil supply is looming—experts forecast that unless large oil discoveries are made soon, the world could be short of oil as early as in the mid-2020s.

The latest such prediction comes from energy consultancy Wood Mackenzie, which sees a supply gap opening up in the middle of the next decade. At the current level of low oil discoveries and barring technology breakthrough beyond WoodMac’s assumptions, that supply gap could soar to 3 million bpd by 2030, to 7 million bpd by 2035, and to as much as 12 million bpd by 2040.

It’s not that discoveries aren’t being made, they just aren’t enough to offset the natural decline at mature fields while global oil demand is still expected to continue to rise.

The main reason for lower discoveries is that spending on exploration has drastically plunged since the 2014 oil price crash. The good news is, according to Wood Mackenzie, that the volume of new discoveries is correlated with spending on exploration. So if spend were to increase, the chance of more and major oil discoveries gets higher.

As early as the beginning of this year, WoodMac said that the share of exploration of upstream investment has slipped to below 10 percent since 2016 and is not about to recover. “This could be the new normal, with the days of one dollar in six or seven going to exploration forever in the past,” the consultancy said in its ‘5 Things to look for in 2018.’

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Over the past year, however, exploration seems to have gotten “its mojo back,” WoodMac said in June, noting that oil discoveries offshore Guyana continued to deliver more oil volumes, major high-value discoveries were made in the U.S. Gulf of Mexico, as well as on the Mexican side of the Gulf, by Shell, Chevron, Talos, and Eni.

The dramatic cut in spending, including on exploration, has done one good thing to the industry—it forced companies to realign strategies and look to do more with less. According to Andrew Latham, Vice President, Global Exploration at WoodMac, “this will be the first time in a decade the industry has actually created rather than destroyed value.”

On the flip side, the oil industry is now finding less oil and gas than it used to, Latham noted.

So, “Fact is, we need more Guyanas, a lot more, and we need them soon,” Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, said in a post last week.

Related: OPEC Secretly Discusses 500,000 Bpd Production Boost

The industry basically needs to replace one North Sea each year, as the world needs to replace 3 million bpd of supply decline from mature fields, while global oil demand continues to grow at a robust pace, the International Energy Agency (IEA) said in its Oil 2018 report in March.

Global upstream investment—which includes exploration spending—has just started to rebound from the 2015-2016 lows, the IEA said in its report on 2018 world energy investment in July.

With the oil price crash, investment plummeted in 2015 and 2016 from the peaks in 2014, but last year’s investment rebounded by 2 percent in real terms, the IEA said, expecting the same level of growth this year as well.

Companies are still keeping very tight discipline on capital expenditure and costs and are looking to reward shareholders with fatter dividends now that they are getting more cash from the upstream divisions thanks to the higher oil prices. But the industry as a whole can’t afford to neglect spending on exploration because a supply gap may be lurking just around the corner.

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