Industry scrutiny over the fallout from massive oil sector
spending cuts on the global oil supply curve appeared to return this
week as market watchers pick over the winners and losers in the
ongoing battle with low prices.
According to a new study by Bank of America Merrill Lynch Wednesday,
Saudi Arabia, Iran and Iraq will need to fill a global oil supply
gap in the coming years as non-OPEC oil producers increasingly
struggle to maintain output levels as a result of huge spending
cuts.
Capital spending by the global oil and gas industry has shrunk by
more than 40% or $280 billion since 2014 in response to low oil
prices and field decline rates have accelerated as a result, the
bank said.
Average oil field decline rates outside OPEC have now risen to 5%,
up from the 4.87% recorded in 2009, according to the bank, with
Australia, the Netherlands, Canada, and Russia leading the recent
acceleration. Regionally, the non-OPEC decline rates are
accelerating particularly in the Middle East, OECD Pacific, and
Africa but have held up better in Asia.
"Given the large reduction in investment and drilling activity,
we would expect non-OPEC decline rates to keep accelerating in the
next few years," the bank said.
With over 90% of global oil production accounted for by conventional
fields, average decline rates have been under close scrutiny since
2014 for clues to the scale of the potential supply impact. At 5%
average decline rates, some 2.8 million b/d of new oil production
would be needed just to replace non-OPEC field declines in 2016.
In December, Norwegian oil consultancy Rystad Energy warned of a new
shortage of crude "a few years down the road" as a result of massive
spending cuts by the global oil industry. Investment decisions to
develop just 8 billion barrels of oil were taken by oil companies
last year, less than a quarter of oil output that needs to be
replaced every year from new projects, it said.
Patrick Pouyanne, CEO of French oil company Total, has also warned
of a possible 10 million b/d global oil supply deficit by 2020 given
forecasts of planned upstream projects and the additional capacity
needed to cover natural field declines.
BP, for one, has made much of holding its field decline rates below
average industry levels. Speaking on an earnings call Tuesday, BP's
upstream chief Bernard Looney said BP's hopes of growing production
capacity in the coming years in the face of low oil prices will be
underpinned by keeping decline rates close to the 3% average they
have seen since 2012.
BP is banking on bringing 800,000 boe/d of new capacity on line by
2020, as its readies its balance sheet to survive with $50-55/b oil.
For planning purposes, however, the oil major acknowledges that
future base decline rates could still rise up to 5% and no targets
of actual production have been given.
DISCOVERY BLACK HOLE
In addition to rising decline rates, market watchers have expressed
concerned over an apparent lull in new oil and gas discoveries,
another factors which could accelerate the world's reliance on
OPEC's oil.
In April, Wood Mac predicted a potential shortfall of 4.5 million
b/d of global oil supply by 2035, unless discoveries exceed the
current annual average of 8 billion barrels. According to the energy
research group, the volume of conventional oil discovered over the
past four years has more than halved compared with the previous
four-year period, falling from 19 billion barrels/year to 8 billion
barrels between 2012-15.
The sentiment was echoed by analysts from Tudor Pickering & Holt
this week which noted concern over "anemic global exploration
activity and low success rates."
The investment bank noted that most oil majors and a number of
countries have failed to boost production from their conventional
fields in recent years.
"After almost two years of capital starvation, the world's legacy
production base is showing signs of wear and tear. Depletion never
sleeps and the 60 million b/d not sourced from OPEC or onshore
Lower-48 US shale is suffering from insufficient maintenance," the
bank said.
Whether oil markets should be concerned over the recent slowdown in
new oil finds and accelerating decline rates at existing fields
depends on how capable OPEC's top Gulf producers are at developing
their sizable conventional reserve base, according to Bank of
America.
While higher output from Saudi Arabia, Iran and Iraq may prove the
most likely source of new supply, questions remains over the
capacity of the OPEC producers to fill the widening gap given
current investment trends, the bank said.
Iraqi rig count have halved over the last two years while Saudi
Arabia has barely increased drilling activity since oil prices
tanked.
"The rig count in Abu Dhabi and Kuwait has increased, and that's a
relevant shift. Yet the geopolitical and legal risks involved in
dealing with Iran and even Iraq will likely limit investments in
other sections of the Persian Gulf, in our opinion," the bank said.
Bank of America reiterated its estimates that global oil supplies
will expanded by 200,000 b/d year-on-year in 2017 and retained its
view that Brent will average $61/b next year.
--Robert Perkins,
robert.perkins@spglobal.com
--Edited by Maurice Geller,
maurice.geller@spglobal.com
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