Journally Speaking: The future looks…bright?

Now would seem a strange time to discuss oil shortages. But annual average oil demand was growing at a remarkably consistent 1.1 million b/d for 30 years, to a little over 100 million b/d just before COVID-19 shut the global economy down. The US Energy Information Administration (EIA), and common sense, predict that this growth will pick back up where it left off soon enough, perhaps within a year and almost certainly by mid-2021.

Which leads to the supply side of the equation. Short term oversupply is a big issue. The next 3 years are going to be hard for oil producers. Storage volumes are at historic highs, keeping downward pressure on prices perhaps well into 2022 even if the Organization of Petroleum Exporting Countries and its supporters (OPEC+) significantly restrict production, a period over which $86 billion of debt is due from exploration and production companies. Shale oil producers are particularly vulnerable, with up to 30% of them potentially defaulting, according to analysts. Big names like Apache and Occidental have lost investment-grade status.

Not that the fields will be going anywhere. Large producers, in better financial position, are just waiting to swoop in and buy distressed assets at bargain prices. However, this is a long-term strategy. Over the next several years production from shales will continue to experience high decline rates and retrenched drilling.

This loss in production has to be made up somewhere and new production is coming from large-scale conventional oil fields such as John Sverdrup in the North Sea; Atlantis, Calliope, Bulleit, and Orlov in the US Gulf of Mexico; Lara and Buzios in Brazil’s pre-salt; and Liza in Guyana-Suriname basin. I can’t help but recall in 2017 a former colleague telling me to “drop the deep-water experience off your resume, it’s worthless.”

What happens next

This new offshore production will get us through the first part of the 2020s, but what beyond? It may seem premature to worry about 2025, but a student starting a petroleum engineering curriculum this fall will have to deal with 2025 production as soon as he or she graduates. All the mentioned fields will begin Phase-1 decline by then and will be planning Phase-2 drilling.

Supply, however, may be slow in coming. The worldwide reserves-to-production ratio has been largely flat since 2015 at about 50 years. For this ratio to even remain steady, exploration needs to constantly chase depletion. But exploration is in decline. In 2014, there were 400 discoveries, dropping to 200 from 2015-17, and further dropping to 140 in 2018. Rystad Energy reports that global capex decreased from a peak of $880 billion in 2014 to $510 billion in 2019 and will decrease close to another 20% to $450 billion in 2020, the lowest in 13 years. Pre-COVID-19, Rystad had expected spending to be flat from 2019, a level insufficient to maintain reserve replacement.

New exploration is needed. Demand will be the key to funding it, and nothing suggests demand will significantly decrease in the long term even as new energy sources replace much of oil and gas’s role as a primary fuel for space heating, power generation, and transportation.

But electric cars will not only need to be plugged into something, they’ll need to be built from something. Grand View Research predicts the automotive segment is set to become the fastest growing application for plastics use over the next 7 years. Plastics in general are expected have 3.5% compounded annual growth rate, and McKinsey’s plastic consumption prediction shows an uptick from there starting in 2025, though most of the increased demand is supplied by recycled and recovered feedstocks. The plants that recover these recycled feedstocks, however, will need to run on something, and natural gas is the most likely candidate.

Virus be damned, the world will continue to be more invested in hydrocarbons, not less.