The rise in unconventional oil has culminated in a “major capex crisis” for the oil majors, the group finds. Since 2000, annual upstream oil and gas industry investment rose 180 percent, from $250 billion in 2000 to $700 billion in 2012 (Chart 36). These findings may be intuitive given the rapid expansion of unconventional drilling in the U.S. during that period (e.g., offshore, shale), but the results are nonetheless interesting. First, the researchers point out there has been a threefold increase in industrial capital expenditures since 2000, but comparatively low supply to show for it: the supply of petroleum liquids and bio-fuels increased only 16 percent (12.4 mbd); crude oil supply rose only 11 percent (7.4 mbd). Second, capital outlays have risen faster than prices—90 percent to 75 percent, respectively. The result of these factors, the authors say, is diminishing returns of upstream capital expenditures given incremental supply generated since 2005.
Using IEA data, the report draws attention to the fact that oil fields already in production will account for 71 percent of total crude oil production between 2013 and 2025, but only 43 percent of crude production thereafter from 2025 to 2036 (Charts 52 and 53). Much of the new production will be picked up by unconventional wells, like horizontal fracturing in shale rock.
In the long run, as consumer adoption of electric vehicles (EVs) accelerates and the price to produce other forms of energy declines, the report argues oil will struggle to stay viable. In its World Energy Outlook for 2013, the IEA expects EV sales to reach 500,000 vehicles by 2020, resulting in an oil savings of 35,000 barrels per day (bbd) in 2020, and 235,000 bbd in 2035. However, record EV sales in recent months suggest these may be conservative estimates. “Against this uncertain backdrop […] we think the majors should be asking themselves whether it makes sense to replace lost output from their existing producing assets on a barrel-for-barrel basis, or whether in fact they should be reducing their capital allocation to higher-cost new projects (i.e. those requiring a price of > $100/bbl)[…],” investing this available money into a wider energy portfolio. If the oil majors stick with petroleum-based capital expenditure projects in the coming decades, Lewis and colleagues conclude, they may be trapped with significant sunk costs in unconventional drilling infrastructure—irrespective of the conventional economic wisdom. On the one hand, falling oil prices brought about by lower demand would create less of a need for these resources. One the other, rising oil prices brought about by constrained supply would strap the majors to expensive projects for diminishing returns. In the end, a diverse portfolio of multiple energy sources may prove to be the best option heading into the future.
October 15, 2014
October 10, 2014
October 10, 2014