Global energy security concerns caused by historic decline in Oil Discoveries, new Projects

(June 2, 2017) Global oil discoveries fell to a record low in 2016 as companies continued to cut spending and conventional oil projects sanctioned were at the lowest level in more than 70 years, reports the Paris-based International Energy Agency (IEA). The agency warns that both trends could continue this year. Oil discoveries declined to 2.4 billion barrels in 2016, compared with an average of 9 billion barrels a year over the past 15 years. Meanwhile, the volume of conventional resources sanctioned for development last year fell to 4.7 billion barrels, 30% lower than the previous year as the number of projects that received a final investment decision dropped to the lowest level since the 1940s.

This sharp downturn in activity in the conventional oil sector was the result of reduced investment spending driven by low oil prices. It brings additional cause of concern for global energy security at a time of heightened geopolitical risks in some major producer countries, such as Venezuela. The slump in the conventional oil sector contrasts with the resilience of the U.S. shale industry. Here, investment rebounded sharply and output rose on the back of production costs being reduced by 50% since 2014. This growth in U.S. shale production has become a fundamental factor in balancing low activity in the conventional oil industry, notes IEA.

The agency adds that conventional oil production of 69 MMbbld represents by far the largest share of global oil output of 85 MMbbld. In addition, 6.5 MMbbld come from liquids production from U.S. shale plays, with the rest made up of other natural gas liquids and unconventional oil sources such as oil sands and heavy oil.

With global demand expected to grow by 1.2 MMbbld a year in the next five years, IEA has repeatedly warned that an extended period of sharply lower oil investment could lead to a tightening of supplies.

Exploration spending is expected to fall again in 2017—for the third year in a row—to less than half of 2014 levels, resulting in another year of low discoveries. The level of new sanctioned projects so far this year remains depressed.

“Every new piece of evidence points to a two-speed oil market, with new activity at a historic low on the conventional side, contrasted by remarkable growth in U.S. shale production,” says Fatih Birol, IEA executive director. “The key question for the future of the oil market is: For how long can a surge in U.S. shale supplies make up for the slow pace of growth elsewhere in the oil sector?”

The U.S. shale industry has lowered its costs to such an extent that in many cases it is now more competitive than conventional projects. The average break-even price in the Permian Basin in Texas, for example, is now at $40/ bbl to $45/bbl. Liquids production from U.S. shale plays is expected to expand by 2.3 MMbbld by 2022 at current prices and expand even more if prices rise.

The offshore sector, which accounts for nearly one-third of crude oil production and is a critical component of future global supplies, has been particularly hard hit by the industry showdown. In 2016, only 13% of all conventional resources sanctioned were off shore, compared to more than 40% on average between 2000 and 2015.

In the North Sea, oil investment fell to less than $25 billion in 2016, about half the level of 2014. Coincidentally, this is now approaching the spending level for wind projects in the North Sea, which has doubled to about $20 billion in the same period.

(SOURCE: The Weekly Propane Newsletter)