Annual upstream investment in oil and gas will need to reach $640 billion in 2030, more than 28 per cent up from last year’s $499 billion, to ensure adequate supplies, a report has shown.
The new estimate is about 18 per cent higher than the previous prediction, “primarily because of rising costs”, said the report, which was jointly produced by the International Energy Forum and S&P Global Commodity Insights.
A cumulative investment of $4.9 trillion will be needed between 2023 and 2030 to meet market needs and prevent a supply shortfall, even if demand growth slows towards a plateau, it said.
“This is a significant ask from investors and companies, but one that has become critical in light of the 2020-2021 downturn and erosion of supply buffers in the market,” the report stated.
“Continued upstream investment is needed just as much, if not more, to offset expected production declines than to meet future demand growth.”
Adequate investment is needed for stable markets, and if investment falls short, high prices and high volatility could become the new standard, the report said.
“Underinvestment threatens to undermine energy security in the short and medium term and it can also stall progress on climate goals by increasing reliance on more carbon-intensive options in the short term,” it added.
Without additional drilling, the report estimated that non-Opec production would decline by nine million barrels per day by 2026 and 17 million bpd by 2030.
Oil and gas upstream capital expenditures increased by more than 39 per cent on an annual basis in 2022 to $499 billion. It was the highest level since 2014 and the largest year-on-year gain in history.
“Higher costs primarily drive the increase in investment, but activity has also started to recover. The global rig count is up 22 per cent from a year ago but remains 10 per cent below 2019 levels,” the report said.
Oil prices rebounded on Thursday after falling for two straight days as prospects of higher demand offset a large increase in US crude stocks.
Brent, the benchmark for two thirds of the world’s oil, was trading 0.08 per cent higher at $85.45 a barrel at 7.44pm UAE time on Thursday.
West Texas Intermediate, the gauge that tracks US crude, was up 0.17 per cent at $78.72 a barrel.
On Wednesday, the International Energy Agency raised its 2023 global oil demand estimates on China’s reopening.
Global oil demand will rise by two million bpd to 101.9 million bpd this year, up from the agency's forecast of 1.9 million bpd last month, it said.
A slowdown in the global economy and a tightening of global monetary conditions present challenges to the demand outlook and access to capital in the industry that has the task of jump-starting upstream investment after stalling in 2020-2021.
The International Monetary Fund lowered its global growth estimate and forecast for 2022 and 2023 by one percentage point or more in the past 12 months. In its latest update, the IMF warned that nearly 33 per cent of the world economy will enter a recession in the next year and the lost output through 2026 will total $4 trillion.
The major constraint on near-term investment levels has shifted from capital availability to capital allocation, the report said.
“Oil and gas E&Ps [exploration and production] are experiencing record profits. While companies prioritise returns to shareholders, share buy-backs, and debt repayment, they still have ample free cash flow that could jump-start upstream investment,” the report said.
“The question is now, will companies reinvest, and if so, where?”
If the world economy enters a recession in 2023, depending on the duration and depth, it is possible that oil demand growth could remain below trend in the next couple of years, it added.
Once economic activity recovers, it is likely to be less oil demand-intensive than it would have been due to fuel switching, electric vehicle penetration, efficiency improvements and accelerated climate policies.
“The near-term uncertainty of demand and the potential medium-to-long-term consequences add to investment hurdles and deterrents,” the report said.
“However, it also provides a valuable opportunity for upstream investments to catch supply up with demand.”
Global spare production capacity will remain limited in the near term, the report said. Current global spare production capacity is at only two million bpd to 2.5 million bpd and nearly all of it is held by Saudi Arabia and the UAE.
Gulf producers typically maintain a buffer to increase production in unexpected supply cuts and emergencies.
Saudi Arabia plans to increase capacity to 13.2 million bpd (from their current 12.2 million bpd) by 2027, and the UAE plans to expand to five million bpd (from 4.2 million bpd) by 2027.
However, actual production increases will depend on Opec+ policy and their desire to maintain their traditional safeguard, the report said.
It further suggested that the energy sector and policymakers can prepare and help mitigate negative impacts by taking various steps.
These include increasing producer-consumer dialogue, bolstering inventories, providing regulatory and policy certainty, supporting long-term contracts, de-risking investments, basing policies on realistic energy demand scenarios and increasing market transparency.
