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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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The Oil Industry Needs Large New Discoveries, Very Soon

Transocean

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.’ Related: Refiners Struggle To Adapt To The Shale Boom

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.

By Tsvetana Paraskova for Oilprice.com

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  • Lee James on October 01 2018 said:
    So I guess the question I ask is, is it fewer barrels of oil discovery per dollar of upstream spending that is driving oil companies to slow exploration, and grab increased profitability in the short term?

    As nearly as I can tell, politically it's harder today for Western countries to pull oil out of the rest of the world. Meanwhile, the crude in the West is either running low or is becoming increasingly expensive to extract.

    Maybe in the back of our minds, we realize that we're probably going to need to de-emphasize the role of fossil-fuel burning in our economy and our lives?
  • Bill Simpson on October 02 2018 said:
    Roughly 9 years ago, I predicted problems would begin around now. But then horizontal drilling and fracking with sand injection came along, which opened up shale and thin layers of oil saturated rock for exploitation. That gave us another 5 to 10 years of breathing room.
    Fracking advances forced a reevaluation of my peak production date to as early as 2022. It might be as late as 2025, but not much past that without a globally coordinated subsidized crash exploration program of oil exploration and production. That is unlikely to happen in time to push back the peak. So look for problems to begin between 2022 and 2025.
    Be aware that a few years after global oil production begins to decline, the post peak problems will rapidly emerge. Before 2030, lack of transportation energy will force the economy to begin shrinking. Problem is, debts can't be paid in a continually shrinking economy. If it could, we could all just slowly adapt to being poorer with less oil. Consumption could gradually shrink. But the financial system can't handle that for too long. Defaults will probably take the whole system down, like subprime housing debts nearly did when they went bad in 2008.
    And no amount of preparation can protect us from a complete banking meltdown. I suspect that civilization will collapse, and billions of people will starve to death. Humans won't go extinct. But the survivors will live like people did in the Middle Ages.
    Keeping working nuclear reactors from melting down, and releasing massive amounts of radiation into the environment after the electric grid goes down should be the top government priority. You wouldn't want widespread radioactive contamination to add to the problems faced by the survivors of the collapse. That would shorten their lifespan even more.
    And nobody will be living on Mars. That's Hollywood and science fiction. This planet is it.
  • Jhm on October 02 2018 said:
    I think WoodMac is overlooking the 25B Boe discovery in Sparks, NV. At full capacity, this field will deliver about 2.3 mboepd. And there's more where that came from. It's a super cheap discovery too, only about $10B or $0.4/boe.
  • Martin on October 02 2018 said:
    "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."

    according to hsbc bank raport oil declines from 3 to 6% per year after peak and ~80% is in decline.
  • Corvettekid on October 02 2018 said:
    Good article but I wonder about projecting out to 2035. Go back to the 2000's or 1990's or 1980's and you wouldn't believe the projections and forecasts and shortfalls/glut projected out a few years, let alone 10 or 15 years like mentioned here. All over the map !

    What happens if Nigeria stabilizes politically and double production in a few years -- don't laugh, that's what happened in Iraq. Speaking of which, what if they continue to increase production ? I spoke to an energy analyst years ago who told me that if Iraq got its act together they could pump 8-10 mmboe/d just like Saudi Arabia. It's a question of politics, not geology.

    Venezuela ? Angola ? Mexico ? There is so much oil that can be pumped if you replace incompetent governments and leaders that you can EASILY come up with 10-15 mmboe/d.

    Of course, you can also make a case for that oil to stay off-line, which is what happened from 2010-14 which is why oil floated above $100/bbl. for most of that time.

    Elephant fields would be nice. They aren't a necessity.
  • Black Gold on October 02 2018 said:
    Oh but wait...EV’s are coming, they will finish the oil industry and we won’t need oil they said..will we .? ...Oh sorry I made a mistake, I forgot....the generators which feed the grid which charges these little cars ..those generators all run on diesel. Silly me. The young bearded guys must be wrong I guess.

    The fact is oil is here to stay and demands are about to go through the roof. The oil price is showing signs of taking off already even now and the industry is about to explode again. We are headed in to the biggest oil boom ever known.

    The gap has to be filled somehow .....and then some.

    This isn’t hype. This is simple supply and demand.

    Oil is running out. A few years ago we were told by men in suits that we have too much oil. Now the truth is out. Get your hard hat, gloves and boots on, you are about to make the most money you’ve ever made..!!
  • Michael Manley on October 03 2018 said:
    I've been saying the same thing for 50 years now and will keep saying it if I live to 150! It can never be said too often.

    Limited supplies in a high demand environment. Geologic resources are finite while human wants are infinite. Those who predicted peak whale oil and whale extinction were right, if only petroleum hadn't been so cheap and abundant back then.
  • Heinrich Leopold on October 05 2018 said:
    What about shale? There was much talk about how shale will fill the gap. Now there is complete silence how shale will save the world and it is up to Russis and OPEC to fill the gap.

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