Wood Mackenzie forecasts that global oil and gas development spend needs to increase by around 20% to meet future demand growth and ensure companies sustain production next decade.
Malcolm Dickson, director, upstream oil and gas, said: “Companies will need to start investing again to sustain their business. But decision-making will be fraught with uncertainties, the oil price and energy transition not least among them.”
Wood Mackenzie’s research shows the recovery is much slower and shallower than in previous cycles. Development spend will increase 5% this year, after a 2% rise on 2017.
Investment rises from a low of US$460 billion in 2016 to just over US$500 billion in the early 2020s – far below the US$750 billion peak in 2014.
Tom Ellacott, senior vice president, corporate research, said: “Four years of deep capital rationing have had a severe impact on resource renewal, especially in the conventional sector.
"Companies are rightly cherry-picking the best conventional projects in their portfolios for greenfield development. But not enough new high-quality projects are entering the funnel to replace those that have left.”
As a result, conventional growth inventories have shrunk during the downturn.
Global pre-FID conventional reserves now only cover two years of global oil and gas production. While there is a new wave of big LNG projects coming, investment in conventional, deepwater, US shale gas and oil sands will be well below pre-downturn levels.
Only US tight oil is set for consistent investment growth over the next few years, driven by the Permian.
The result is a corporate sector divided in two: the US tight oil “haves” with a strong outlook for investment and growth; and the “have nots”, the majority of which face a looming production challenge next decade.
What's needed to kick-start a new investment cycle?
Wood Mackenzie calculates that annual development spend will need to increase to around US$600 billion to meet future demand for oil and gas through next decade.
But Mr Ellacott does not expect a rush to re-invest.
“Many companies will justifiably be concerned about committing substantial capital to long-term projects with peak oil demand and energy transition risks within the investment horizon,” he said.
“There's also a prevailing mindset of austerity designed to appease shareholders — investment is lower in the pecking order for surplus cash flow than dividends and buy-backs.”
Wood Mackenzie expects strict capital discipline to continue to frame investment decisions, at least in the near-term. This will favour short-cycle, higher-return opportunities.
The performance of US tight oil will be critical. US tight oil spend peaks in 2023 at a level 20% higher than 2014 in our base-case.
Out-performance in the Permian could drive upside to this figure. But there are also downside risks that will need to be carefully managed to ensure tight oil does not fall short of expectations.
Bigger and better conventional projects will ultimately be required.
Around half of the reserves in our pre-FID project dataset need oil prices above US$60 per barrel to achieve a 15% return – in this disciplined world many companies are screening new projects on long-term oil prices well below spot.
Further progress in project re-scoping, digitalisation and better fiscal terms will all need to play their part in getting these projects over the line.
Exploration success will also be crucial to replenishing depleted conventional inventories. Yet-to-find volumes offer great potential. But exploration budgets were slashed 60% during the downturn and have yet to recover.
Spending will need to increase to deliver the required volumes to drive higher investment.