August 2022

The Last Barrel: Underinvestment continues to sting

The transition to renewables and clean energy alternatives has created an unprecedented reduction of investment in hydrocarbon-based energy, in favor of developing green resources.
Craig Fleming / World Oil

The transition to renewables and clean energy alternatives has created an unprecedented reduction of investment in hydrocarbon-based energy, in favor of developing green resources. In 2021, global oil and gas discoveries hit their lowest level in 75 years. Total global discovered volumes in 2021 were calculated at 4.7 Bboe, the lowest tally since 1946. This trend is predicted to continue during 2022. A data-based comparison and evaluation shows a significant reduction in recoverable oil resources that will drive commodity prices higher, and further damage global energy security. 

According to the analysis, global recoverable oil now totals an estimated 1,572 Bbbl, a reduction of 9% since last year and 152 Bbbl fewer than 2021’s total. Recoverable oil corresponds to the industry term, “remaining technically recoverable crude oil and lease condensate.” This includes expected volumes from fields, discoveries and risked future discoveries. The drop in reserves is driven by the 30 Bbbl of oil produced last year, plus a significant reduction in undiscovered resources, which is approximately 120 Bbbl. The U.S. offshore sector has contributed the largest amount to that drop, where 20 Bbbl of oil will remain in the ground, largely due to leasing bans on federal land. Referring to a report on recoverable oil resources, Saudi Arabia holds the top spot with 275 Bbbl, followed by the U.S. with 193 Bbbl (The U.S. EIA’s last estimate of U.S. “proved” crude and condensate reserves from end-2020 is 38.2 Bbbl). Russia has 137 Bbbl, Canada contains 118 Bbbl, and Iraq with 105 Bbbl rounds out the top five. 

Striking a balance. Of the 1,572 Bbbl of technically recoverable oil, only about 1,200 Bbbl are likely to be economically viable before 2100 at $50/bbl. This economically extractable oil would contribute about 0.1˚C of additional global warming by 2050, and somewhat less by 2100, thanks to natural carbon sinks. “While the drop in oil availability is positive news for the environment, it may threaten to further destabilize an already precarious energy landscape,” says Rystad analyst Per Magnus Nysveen. “Energy security is a matter of redundancy; we need more of everything to meet the growing demand for transport, and any action to curb supply will quickly backfire on pump prices worldwide, including large producers, such as the U.S. Politicians and investors can find success by targeting energy consumption, encouraging electrification of the transport sector and drastically improving fuel efficiency,” 

Looking at the long term, the analysis group has downgraded their estimates for total undiscovered oil from 1 trillion bbl in 2018 to just 350 Bbbl, due to a rapid collapse in investor appetite for exploration exposure, leading to fewer government leases. This downward revision is good news for carbon compliance, but it could have negative consequences for global energy security, particularly if electric vehicle adoption falls short of expectations. 

European energy prices hit record highs. The war in Ukraine has limited Russian oil and gas supplies and has the potential to cause a major shift in the world’s energy market. Following a small decline in power prices in most European markets during the first week of August, new highs were reached in several markets. Fresh records also were set in natural gas and power futures, with German power for 2023 surpassing €500/MWh for the first time. Week 33 is on track to break the weekly records in most markets and with a solid margin in France, Germany, the UK and the Nordics. Daily average prices are back above €500 in Italy, France and Germany. And Germany hit a new daily record for 2022 on August 17, with €552/MWh on low wind and expensive coal and natural gas power. 

Prices in the UK also reached a record high for the year on Aug. 17 at €486/MWh. Low wind speeds have been a factor in the UK, increasing the natural gas-for-power demand. The British NBP gas price benchmark also has surged in recent days, increasing the cost of natural gas power generation in the UK. In Norway, power prices reached a new daily record on Aug. 17 at €496/MWh, more than 400 times higher than prices in the north of Norway. 

U.S. production surges. Despite a sizeable drop in recoverable resources, U.S. oil production remains on track for a record in 2023, even as output grows more slowly than anticipated, amid surging costs and labor shortages in America’s shale fields. Output is expected to expand at an average rate of 840,000 bopd next year, down from a prior forecast of 860,000 bopd, according to the EIA. While production is still seen reaching an all-time high in 2023, the government revised its forecast slightly lower to 12.7 MMbopd. The current annual U.S. record is 12.3 MMbopd, set in 2019. 

The reduced supply forecast may weigh on an already stretched market after Russia invaded Ukraine, prompting widespread bans on Russian energy. The U.S. was previously a key swing producer, usually capable of ramping up supply quickly, as global demand shifts. In recent years, however, shale producers have limited growth in favor of increasing shareholder returns, and in the face of soaring oilfield costs. The EIA also lowered this year’s production forecast, estimating U.S. output will average 11.86 MMbopd in 2022. That’s the lowest forecast since the agency’s January report. Meanwhile, the agency sees global petroleum consumption growing by 2.1 MMbopd this year and next, but cautioned that a recession poses demand risks. 

Reserve replacement strategy. The dynamics in the energy industry have shifted, and the result has been an emphasis on energy security and diversification of supply. Our industry must find new methods and technologies to replace the reserves we are using by producing more from mature fields. This will enable us to lower costs by utilizing existing wells and infrastructure.

Listen to our new podcast, The Reservoir, where we discuss this topic in depth.

About the Authors
Craig Fleming
World Oil
Craig Fleming
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