It may be difficult to look beyond the current pricing environment for oil, but the depletion of low-cost reserves and the increasing inability to find major new discoveries ensures a future of expensive oil.
While analyzing the short-term trajectory of oil prices is certainly important, it obscures the fact that over the long-term, oil exploration companies may struggle to bring new sources of supply online. Ed Crooks over at the FT persuasively summarizes the predicament. Crooks says that 2014 is shaping up to be the worst year in the last six decades in terms of new oil discoveries (based on preliminary data).
Worse still, last year marked the fourth year in a row in which new oil discoveries declined, the longest streak of decline since 1950. The industry did not log a single “giant” oil field. In other words, oil companies are finding it more and more difficult to make new oil discoveries as the easy stuff runs out and the harder-to-reach oil becomes tougher to develop. Related: Shale Rivals OPEC As Swing Producer
The inability to make new discoveries is not due to a lack of effort. Total global investment in oil and gas exploration grew rapidly over the last 15 years. Capital expenditures increased by almost threefold to $700 billion between 2000 and 2013, while output only increased 17 percent (see IEA chart).
Despite record levels of spending, the largest oil companies are struggling to replace their depleted reserves. BP reported a reserve replacement ratio – the volume of new reserves added to a company’s portfolio relative to the amount extracted that year – of 62 percent. Chevron reported 89 percent and Shell posted just a 26 percent reserve replacement figure. ExxonMobil and ConocoPhillips fared better, each posting more than 100 percent. Still, unless the oil majors significantly step up spending they will not only be unable to make new discoveries, but their production levels will start to fall (some of them area already seeing this begin to happen). The IEA predicts that the oil industry will need to spend $850 billion annually by the 2030s to increase production. An estimated $680 billion each year – or 80 percent of the total spending – will be necessary just to keep today’s production levels flat.
However, now that oil prices are so low, oil companies have no room to boost spending. All have plans to reduce expenditures in order to stem financial losses. But that only increases the chances of a supply crunch at some point in the future. Put another way, if the oil majors have been unable to make new oil discoveries in years when spending was on the rise, they almost certainly won’t be able to find new oil with exploration budgets slashed.
Long lead times on new oil projects mean that the dearth of discoveries in 2014 don’t have much of an effect on current oil prices, but could lead to a price spike in the 2020’s.
All of this comes despite the onslaught of shale production that U.S. companies have brought online in recent years. U.S. oil production may have increased by 60 to 70 percent since 2009, but the new shale output still only amounts to around 5 percent of global production. Related: Another 5,000 Victims Of The Plunge In Oil Prices
Not only that, but shale production is much more expensive than conventional drilling. As conventional wells decline and are replaced by shale, the average cost per barrel of oil produced will continue to rise, pushing up prices.
Moreover, with rapid decline rates, the shale revolution is expected to fade away in the 2020’s, leaving the world ever more dependent on the Middle East for oil supplies. The problem with that scenario is that the Middle East will not be able to keep up. Middle Eastern countries “need to invest today, if not yesterday” in order to meet global demand a decade from now, the International Energy Agency’s Chief Economist Fatih Birol said on the release of a report in June 2014.
In fact, half of the additional supply needed from the Middle East will have to come from a single country: Iraq. Birol reiterated those comments on February 17 at a conference in Japan, only his warnings have grown more ominous as the security situation in Iraq has deteriorated markedly since last June. “The security problems caused by Daesh (IS) and others are creating a major challenge for the new investments in the Middle East and if those investments are not made today we will not see that badly needed production growth around the 2020s,” Birol said, according to Reuters.
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If Iraq fails to deliver, the world could see oil prices surge at some point in the coming decade. Despite the urgency, “the appetite for investments in the Middle East is close to zero, mainly as a result of the unpredictability of the region,” he added.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
- Oil Majors’ Profits Take A Beating
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The article leaves off with what to do. Are we resigned to unsustainable high oil prices?
Or, do we see the need to reduce the environmental, political and economic consequences of burning oil, and drastically reduce oil dependency?
I sure hope that we are not left saying, "Duh."
Until the glut is resolved, either with production cuts (OPEC refuses) or increased consumption (unlikely as China's GDP growth slows) prices are likely to be in a $50-60 channel.
They will kill off the most inefficient and leveraged frackers, but $50 oil is still returning handsome profits to OPEC members.
Instead consider:
1. There is an abundance of natural gas, which is cleaner, cheaper, and more abundant worldwide. It can replace oil for any use.
2. Fracking and horizontal drilling are becoming more prevalent worldwide, and will continue to improve.
3. As Jim mentioned, most old wells and fields are still ripe for more development.
For example, my truck has a 20 gallon tank, 1 dollar per gallon savings is 20 a fill up once a week. A Honda civic has a 12 gallon tank, 1 dollar per gallon savings is 12 bucks a fill up per week.
So $32 a week in savings, I will never notice. It's not a significant amount. I'd save so much more by ending our families movie night and going out to eat. That's about 150 - 200 a week for a family of four.
So saying cheap gas is gonna save us all is pure bs. I'm more worried about the massive job losses as a result from cheap gas.
So many people are dumb and think that saving money at the pumps is big savings.
All you people that think it is, let me ask has prices gone down in food? No. Has prices gone down in vehicles? No. Has prices gone down say at Disneyland? Nope they just went up. So what does the economy do when oil
Prices go down they take the money out of your pocket in groceries,vehicles, and entertainment. They said a person would save over 900 dollars in a year. What the heck is that in a year. That's nothing. Has home
Prices gone down too? Nope
So that means that's 900 you saved does nothing for you because once you pay for something there will be no more savings coming in so the what do you so called smart Americans do to pay for those things. Not
Much considering oil companies aren't working as much, and not many other jobs around. Trust me higher prices are good because people spend then because they are working.
If you are not in the O&G sector and not a millionaire do you ever had the chance to
1. Take a private plane?
2. Often take business class plane without the need to be upgraded by the airline.
3. Stayed at 5 star hotel.
4. Getting high pay and increments with the same years of experience compared to other sectors.
5. Taking resources without the need to manufacture or purchase the raw materials.
6. Getting lucrative packages when travelling / in expat programs.
and plenty more.