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Shale Investment Booms, But Global Oil Has A Big Problem

West Qurna Iraq

The multi-year downturn in upstream oil and gas investment could come to an end this year, according to a new report from the International Energy Agency (IEA).

The IEA’s World Energy Investment 2017 report predicts a slight increase in oil and gas investment this year, rising by 3 percent. That comes after a plunge of 44 percent between 2014 and 2016, a steep drop off due to the crash in oil prices. In 2016 alone, spending on oil and gas fell by 26 percent from a year earlier, dropping to $650 billion. This year’s expected increase will halt the slide in spending.

However, things are not all well. The only reason the industry might avoid another year of spending contraction is almost entirely due to U.S. shale, which will see investment increase by 53 percent. Investment in the Middle East and Russia is “resilient,” but the global oil industry on the whole is retreating from complex megaprojects that, while expensive, represent consistent sources of supply over the long run. Instead, oil companies are focusing on short-cycle shale projects that recycle cash quickly, reducing risk. So even as spending on shale is bouncing back strongly, expenditures on exploration will continue to contract, falling by a projected 7 percent this year after plunging by half in the previous two years.

(Click to enlarge)

Sharply lower levels of investment in large-scale projects increases the odds of a supply crunch “at some point down the line,” even if that shortage is not immediately imminent, the IEA says. The number and volume of new projects given the greenlight by the industry is at its lowest level in 70 years. As these projects fail to come online in five years’ time, the market could find itself short on supply.

Moreover, depletion at older oil fields has accelerated to its fastest rate in a quarter century, with conventional fields in China (down 9.5 percent in 2016) and the U.S. (-8.3 percent) suffering from particularly high rates of decline last year. Related: The Other Culprits Of The Oil Price Crash

The IEA is not alone in its concerns over the notion that an investment slump since 2014 could lead to a supply crunch in the early 2020s. “The long-term situation of oil supplies...is becoming worrying,” Saudi Aramco’s CEO Amin Nasser said at the World Petroleum Congress in Istanbul on Monday, the same industry conference at which the IEA unveiled its Energy Investment report. Nasser warned that the shortfall in investment will mean the world struggles to come up with the additional 20 million barrels per day that will be needed over the next five years. “Investments in smaller increments such as shale oil will just not cut it,” he added.

Meanwhile, falling investment in oil and gas combined with cheaper renewable energy meant that the electricity sector surpassed fossil fuel supply as the largest source of energy investment in 2016 – for the first time in history. And within that electricity component, renewable energy captured the largest slice of investment at $297 billion in 2016.

At the same time, investment in renewable energy is 3 percent lower than it was five years ago, although that should not be viewed as a sign of weakness. Falling costs mean that more solar and wind can be deployed with less and less capital. As evidence, while renewable investment was 3 percent lower in 2016 than it was five years ago, renewable capacity installations were up by 50 percent. Related: Oil Under Pressure As Saudis Break Key Promise

The surge in renewable energy, along with the dramatic fall of coal over the past few years, helped contribute to a third consecutive year of stagnant carbon dioxide emissions last year. However, the IEA warns that the slowdown in nuclear and hydropower will entirely offset the new generation from wind and solar.

For the oil industry, however, the main takeaway is the increasing divergence of the oil industry into a sort of two-track market: an ongoing slump for non-U.S. production, and a sharp rebound in U.S. shale. The flip side of that is that the cost of production is also different in different places. Globally, costs will continue to fall by 3 percent this year, led mainly by falling costs in the offshore sector. U.S. shale, however, will see costs rise by 17 percent, which is mainly the result of higher drilling activity and a tighter market for oilfield services.

Overall, the industry will welcome the end of the three-year freefall in investment, but with little chance of a sharp rebound in spending, there are very serious questions about what happens with oil supply over the long-term.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Mark on July 11 2017 said:
    Oil, oil drillers and oil infrastructure is the investment for the next ten years.

    Nice to see at least one semi bullish article about oil on oil price.com - almost seems like this site is a cheerleader for the bears. I could never understand that?

    Demand is above supply currently and as we move further into the future, supply will move lower but more importantly the five year average will move higher - which makes sense given the overall demand is higher.

  • Jhm on July 11 2017 said:
    Atmospheric CO2 is at 406.56 ppm, and at current rate of increase will breach 450 ppm in 17.2 years. Avoid breach while maximizing the longevity of the fossil fuel industries calls for a 5.8% annual rate of decline emissions.

    With this end game in mind, investments in fossil fuels and fossil consuming infrastructure would do well to decline more than 6% per year. Perhaps the investment decline over the last two years is a head start on this, but this sort of sustained reduction in investment is entirely called for. If the oil and gas industry applies this discipline, it very well could avoid sustained oversupply for years to come. With approaching demand decline, it is critical to avoid a protracted glut.

    Drawing down fossil investments just 6% per year could prove to be the most profitable path forward.
  • snoopyloopy on July 12 2017 said:
    "Nasser warned that the shortfall in investment will mean the world struggles to come up with the additional 20 million barrels per day that will be needed over the next five years."

    To the extent that this pushes up oil prices, it hastens the demise of oil demand as customers seek out alternatives. If prices don't soar, then that means that the market has already adjusted to alternatives even in their absence.
  • david on July 12 2017 said:
    Although the graph show a +53% possible increase in Shale vs production in other countries, it should be highlighted to note the shale production decline curves vs other countries conventional well production.

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