No Oil Supply Crunch Now, Maybe After 2026

The oil market is not headed for a supply crisis in the medium term, but things could get dicey shortly after 2026 unless upstream investment by oil companies picks up or demand growth is curbed. That was a key message from the early October Energy Intelligence Forum 2021. Supply from projects already sanctioned or under development, combined with the 6 million barrels per day of immediately available spare capacity held by the member countries of Opec-plus, are sufficient to meet rising oil demand in the next five years. But TotalEnergies CEO Patrick Pouyanne warned that prices would "rocket to the roof" by 2030 if the industry heeds calls to stop investing in new upstream projects. And several executives warned that the energy transition will trigger price volatility over time, as energy production and consumption patterns shift amid decarbonization efforts.

Forum speakers generally agreed that oil demand would keep growing before peaking sometime in the second half of the decade or shortly after 2030. Energy Intelligence’s medium-term outlook confirms that the world is not running out of oil in the coming years but shows that liquids production outside Opec-plus is set to peak in 2025, and after 2022 the growth rate is glacial. That would allow Opec-plus to bring on more of its spare capacity, with the pace dictated by demand growth.

Executives fret over recent low investments in new oil production capacity, as publicly traded companies respond to investor demands for higher cash returns and coherent energy transition strategies, which are increasingly moving outlays away from oil and gas. This could lead to a lack of hydrocarbon fuels before alternatives are available later this decade.

“Investments are prematurely cut in our industry … capital has become constrained. I’m worried that the worst is still coming and this doesn’t help an orderly transition,” said Saudi Aramco CEO Amin Nasser. Aramco plans to add 1 million b/d in capacity by 2027, while lowering the carbon footprint of its production. Saudi Arabia is discussing bringing on even more capacity if warranted, insiders say, banking that its low-cost and low-carbon oil will have a place for decades in the energy mix.

Likewise, Iraq and the United Arab Emirates plan to grow their output capacity. This oil will increasingly find its way to Asia, where most forecasts see demand growing the longest, while the OECD may have experienced peak demand in 2019. The upcoming COP26 climate summit in Glasgow could alter forecasts, depending on the policy commitments that emerge.

No Spending Hike Yet

Brent's move this month above $80 per barrel is so far not enticing boardrooms to hike upstream capital expenditures significantly, with exploration feeling the brunt of cuts. Some large new plays are still coming on in the US Gulf of Mexico, Guyana, Suriname, the North Sea and China. But oil majors are also divesting substantial assets in response to investors' environmental, social and governance (ESG) concerns.

At the same time, the industry has become more efficient, frequently delivering more oil than previously expected from existing plays. This is especially true offshore, as new fields are tied back to existing platforms, sometimes with subsea carbon capture and green electrification to lower carbon emissions, Arnaud Pieton, CEO of Technip Energies told the Forum.

This trend of expanding existing plays was already well advanced before the International Energy Agency laid out its Net Zero by 2050 road map in May, in which it argued that enough fossil fuel reserves have already been found and no investments in new fields are needed. Ed Morse, global head of commodities research at Citigroup, added that field decline rates in US shale have dropped to around 2% today compared to 15% years ago.

Majors are using fat profits from upstream operations and high prices increasingly as cash engines to finance future low-carbon businesses.

However, uncertainty over the future of upstream investment is growing as the transition accelerates. Outside capital to finance projects from banks is drying up fast. New owners of industry assets are set to emerge, mostly private entities such as national oil companies, sovereign wealth funds, private equity, and international traders like Vitol, Glencore and Gunvor.

Philip Lambert, CEO of Lambert Energy Advisory, said publicly traded Western majors are 90% owned by Western institutions, where ESG pressure is most intense, creating pressure on firms to sell upstream assets. But he warned that "we're struggling to find buyers that have the kind of scale needed to acquire these assets.”