Natural gas and oil investments around the world may be lower today, but activity and production levels remain on par with the industry’s halcyon period between 2010 and 2014, according to Rystad Energy.
“Persistent claims of chronic underinvestment in the global oil and gas industry are overblown,” researchers said. Upstream Investments have declined since spending peaked in 2014 at $887 billion, with about $580 billion expected to be invested this year. And the number of completed wells is forecast to plunge to around 59,000 this year from 88,000 in 2014.
“As a result, many market participants predict that this trend will continue and lead to chronic underinvestment and an oil supply shortage in the coming years,” the Rystad researchers said. “However, our modeling and analysis tell a different story.”
What has not been analyzed effectively are the upstream industry’s efficiency levels. More efficiencies have led to lower unit prices and higher productivity.
“In other words: the industry can do the same as before, but at a much lower cost.”
Worldwide, the gains are being driven by operators working in the Lower 48 and in deepwater fields. Investments also appear to be ticking up, led by LNG and deepwater activity, according to Goldman Sachs Global Investment Research.
The CEOs of BP plc, ExxonMobil, Shell plc and Saudi Arabian Oil Co. have recently lamented underinvestments by the industry, which they have warned have implications for the future. Russia’s incursion into Ukraine in turn also led to an overhaul of priorities, with fossil fuels taking precedence over energy transition efforts.
For example, BP CEO Bernard Looney in February said investments into “resilient” oil and natural gas projects would increase on average by $1 billion a year, or by $8 billion cumulatively to 2030. The additional capital would meet “near-term demand for secure supplies of oil and gas.” Investments in low-emission technologies also are taking a backseat to Shell plc’s Integrated Gas arm, including for liquefied natural gas, the executive team said in June.
What's Reality?
Rystad research found that the industry is putting plenty toward securing future natural gas and oil.
“Contrary to popular opinion, the world is investing appropriate amounts of money in fossil fuel production to satisfy demand,” Rystad’s Espen Erlingsen, Upstream Research head said. “Cost savings mean operators can produce the same amount of oil at a lower cost, and we don’t foresee an oil supply crisis due to underinvestment on the immediate horizon.”
Upstream capital investments worldwide peaked at almost $900 billion in 2014. Spending then fell to around $500 billion when oil prices collapsed in 2015. Investments plunged again five years later as the pandemic scuttled prices.
In 2022, capital spending recovered to around $500 billion, as oil and gas activity bounced back, the researchers noted. Still, even with the rebound, investments in 2022 “reached only 60% of 2014 levels, so it could be easy to assume that upstream activity has declined 40% since 2014.”
What some observers have failed to take into account, though, were the declining unit prices and strong efficiency gains.
“By looking at how unit prices for different supply segments have developed since 2014, we see how costs have fallen,” the Rystad researchers noted. “The unit prices are related to when the spending occurs and not when it is contracted. For most segments, prices have come down by 20% to 30%, resulting in more activity for every dollar spent. Therefore, it would be misleading to only look at the falling investment trend.”
Another key metric is in the number of wells completed every year.
“Activity peaked around 2014 with about 88,000 new wells drilled,” according to Rystad. “As with investment levels, the number of wells fell from 2014 to 2016, then grew until 2019 before dropping during the pandemic.”
The number of new wells in 2022 was around 55,000, down by about 35% from 2014.
“This metric also seems to tell the same story: activity levels are considerably lower than in 2014.”
Positive Story
To more accurately determine activity levels, however, the Rystad team evaluated the expected resources from wells across their lifetime, which is around 30 years. Researchers excluded the impact of cost inflation/deflation, but they included efficiency gains and portfolio changes as operators moved to areas with “more productive wells.”
The research told a different – and more positive – story.
For example, wells that were completed in 2014 had total oil production potential of around 37 billion bbl. That year was one of overinvestment, however, which preceded a sharp retreat in commodity prices.
“From 2014 to 2016, developed resources dropped but much more slowly than investments and well counts, showing that the most productive wells were still drilled during this period,” according to Rystad.
For all of the wells completed in 2022, the oil resource potential was nearly 32 billion bbl, “just 15% lower than in 2014,” according to the data. This year, resource potentials are forecast “to grow further and reach nearly 35 billion bbl.”
The research suggests that new gas and oil resources should exceed total annual production “until at least 2025, demonstrating the positive trajectory of the global oil industry and supporting our conclusion that an underinvestment-triggered supply shortage is unlikely in the short term.”
