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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