The International Energy Agency's Net Zero by 2050 roadmap, issued last year, has become something of a textbook example of bad timing. Just four months later, the agency said the world needs more investment in oil exploration because of dwindling OPEC spare production capacity.
Besides these mixed signals, the agency also lashed out at OPEC+ last year, accusing it of keeping the global oil supply artificially tight to keep prices high. At first glance, one might think the world's most influential energy body, per the FT's Tom Wilson, does not really know what it's talking about. Yet Big Oil does not care about that. Big Oil is drilling. It's just not talking about it.
"The majors are still exploring and say much less about it than they used to," Andrew Latham, vice-president for exploration at Wood Mackenzie, told the FT's Wilson this month. "You have to be a real specialist sector watcher to know these kinds of things [because] they don't talk about it."
According to the consultancy, a total of 798 appraisal and exploration wells were drilled last year, which was about the same as was drilled a year earlier. It was also substantially less than what was drilled in 2019, at 1,256 wells, but the drop was, according to Latham, connected to the pandemic.
This means that, with or without the IEA's roadmap to net zero, this year could see an uptick in new drilling, especially given the strength of oil demand, as admitted by that very same IEA to have exceeded market observers' expectations.
Shell struck a potentially major deposit in Namibia earlier his month, according to reports. It wasn't the company that announced the find. It was Reuters, citing unnamed sources in the know who said the government of the southern African country would make an official announcement this week.
Exxon continues to make find after find offshore Guyana. The latest update came earlier this month and was about plans to start pumping from a second platform in the Stabroek Block, which would boost the country's oil output three times. Meanwhile, the supermajor has also announced plans to become a net-zero company by 2050.
French TotalEnergies, formerly just Total, has been particularly active in new oil well drilling, even as it also ramps up renewable energy expansion. The French company drilled the most new exploration wells last year, according to Wood Mac data cited by the Financial Times, coming ahead of both Exxon, which was second, and Norway's Equinor, which came in third.
For Exxon, it is mostly business as usual. The company has some activist shareholders on its tail but no court rulings obliging it to shrink its oil output, unlike Shell. It is perhaps this fact that makes the Shell case especially interesting. The supermajor was ordered by a Dutch court to slash its emissions footprint by 45 percent within ten years last year, and it said that its production had peaked anyway back in 2019.
Yet Shell is drilling-and not just drilling but doing it in a frontier region with no well-developed infrastructure or oil industry of any sort. This means higher investments should the find be confirmed. Why is Shell doing this?
Reserve replacement is one reason. Even with plans-and an obligation-to produce less oil in the future, the company is not completely giving up its core business. Oil demand, regardless of various forecasts, looks like it still has a few good decades in it. The costs of new wind and solar installations are rising, the supply of critical minerals and metals is limited, and new mine lead times are even longer than the lead times for offshore oil wells. This doesn't bode well for the renewable revolution, but it does bode well for oil and gas demand.
Another reason is oil prices. With these higher, drilling in new underexplored regions becomes more affordable. With Brent crude at $91 per barrel, exploration is a lot more attractive than it probably was with Brent at $40, not least because high oil prices strongly suggest demand is exceeding supply.
Carbon Tracker earlier this month published a report warning that new oil and gas exploration could result in stranded assets worth $500 billion because over the long term, oil demand would perish. Yet the same organization last year forecast a continued slump in the costs of wind and solar power, and that did not exactly play out, just a year after the report, so whether or not these assets will indeed be stranded remains a wide open question.
Big Oil-and small and medium oil, too-is doing what any business would do in the current environment. Said environment suggests that the demand for Big Oil's products is strong. Naturally, they would try to respond to that strong demand by producing as much as they can to satisfy it. But they won't talk about it as openly as they used to before. Instead, they would highlight their investments in wind, solar, and EVs while quietly drilling to ensure there will be enough oil for tomorrow and the day after.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
In embarking on a global drilling campaign, the international oil companies (IOCs) are motivated by two highly crucial factors. One is reserve replacement and the other is very tempting crude oil prices.
The ultimate aim of the IOCs nowadays is survival and without replacing the reserves they use in production, they can’t survive. IOCs have been struggling to secure access to new oil reserves because of rising resource nationalism. This has led to a drop in their production in recent years.
Reserve estimates of top IOCs such as Total, BP, Shell, Chevron, ENI, ConocoPhillips, ExxonMobil, Equinore and Repsol are only expected to last from 8.0-10.5 years. Between 1998 and 2002, top IOCs replaced 99.7% of oil produced. This dwindled to 51.7% between 2003 and 2007. Overall average IOCs’ reserves in place have fallen by 25% since 2015 with less than 10 years of total annual production available. For instance, oil supermajor Shell expects to have produced 75% of its current proven oil and gas reserves by 2030, and only around 3% after 2040.
The other factor is oil prices. For the first time in more than thirty years, both global oil demand and prices are now underpinned by a unique combination: the most bullish global oil market since 2014 and strong indications that the oil market has already entered a supercycle phase defined as a sustained expansion usually driven by robust growth in demand. This combination is going to take Brent crude beyond $120 a barrel in the next few years.
Brent crude oil price has risen above $91 a barrel and could be expected to touch $100 by the fourth quarter of 2022 or the first quarter of 2023 because of an oil market getting tighter and a global spare production capacity getting smaller.
Moreover, the suggestion that high oil prices could trigger $500 bn in stranded assets is complete nonsense because it is based on two deeply flawed assumptions. One is the illusion of peak oil demand and the other is the fallacy that renewables can satisfy global energy demand.
To satisfy global oil demand, the global oil industry and the major oil-producing countries will have to invest heavily in oil exploration and production capacity without which crude oil prices will skyrocket. However, to attract the investments needed, we need higher oil prices.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London