The 2017 World Energy Investment Report by the International Energy Agency showed that the fall in global upstream oil and gas investment in 2015 and 2016 totaled $345 billion. The number of sanctioned crude oil projects in 2016 reached the lowest level since before 1950.
Investment for exploration has fallen more heavily than that for developing existing reserves. According to IEA's report, exploration spending had already halved in 2016 to $60 billion compared with its historic peak in 2014. A further contraction of 7% is expected in 2017. The share of exploration in total upstream spending is set to reach 12% in 2017-the lowest level in more than a decade.
Although cost deflation explains largely the recent fall in nominal investment, the contraction in activity has already translated into a sizeable decline of resources discovered in 2016.
In 2016, total discoveries of conventional crude oil fell by half to just 2.4 billion bbl. The total amount of conventional crude oil resources that were approved in 2016 were just 4.7 billion bbl, a 30% decline compared with 2015, in which approvals were already very low.
Oil supply adequacy
For the time being, the fears about oversupply have not receded in the slightest. However, the unprecedented contraction in upstream oil and gas investment raise major, real concerns about the prospects for the adequacy of supply in the years to come.
Oil remains the leading primary energy source, after 4 decades of decline, and its share in the global energy mix has actually been increasing since 2014. According to IEA, none of the factors that led to stagnating global carbon dioxide emissions had any measurable impact on global oil demand.
"There is no doubt that current upstream investment is not sufficient to cover the medium-term growth in oil demand, given the outlook for macroeconomic factors and current government policies," IEA said. This point has been consistently highlighted in the IEA's recent Oil Market Reports.
Although the US shale oil industry has become a fundamental factor in balancing the market, underinvestment in longer lead-time projects, such as in the offshore, which accounts for nearly a third of crude oil production and is a crucial component of future global supplies, is a concern.
So, the potential emergence of a supply-demand gap in the longer term could exceed the potential for increasing light, tight oil production in the short term, IEA said.
"The longer the investment gap lasts, the more likely it is that a sharp boom-and-bust cycle, characterized by project management bottlenecks, shortages of human capital, and rampant cost inflation, will reoccur," IEA warned.
The report also shows that, given that 85% of the investment need is associated with replacing declining production from currently producing fields rather than increasing demand, the demand reduction from a potentially stronger climate policy does not have a proportional impact on reducing upstream investment needs.
In the IEA World Energy Outlook 2016 450 Scenario, which meets an ambitious climate-mitigation goal, rapidly declining oil demand shape investment but annual field development in the 2020s is still 14 billion bbl compared with 10 billion bbl in 2016.
Gas supply security
Gas is taking an important share of new electric power supply to compensate for less use of coal and to provide flexibility for renewables. The security of gas supply also requires continuous investment, the report noted.
As LNG projects have long lead times, the sharp deceleration of LNG investment in the past 2 years coupled with rising demand could potentially lead to market tightness and volatility.
Underinvestment in gas pipelines also creates infrastructure bottlenecks to compromise supply security, even with abundant gas resources. This is the case in the US Northeast (in particular, New England) and in India.
Both Europe and China will need to develop and maintain substantial amounts of gas-storage capacity. Europe has witnessed the mothballing of storage capacity and the cancellation of several projects. China's gas-storage capacity is increasing, but at a considerably slower speed than winter heating demand.
