Persistent concerns about chronic underinvestment in the global oil and gas industry may be exaggerated, according to a recent research and analysis report by Rystad Energy.
The report challenges the prevailing narrative by highlighting significant efficiency improvements, cost reductions, and evolving portfolio strategies that have boosted the industry’s performance despite declining investments.
With investments in the upstream sector plummeting since their peak of $887 billion in 2014, projections indicate that approximately $580 billion will be invested in the industry this year. The number of completed wells has dropped from 88,000 in 2014 to 59,000 in the present year.
While many industry experts anticipate a continued trend of underinvestment leading to an oil supply shortage, Rystad Energy’s analysis paints a different picture.
The report says that lower unit prices, efficiency gains, productivity improvements, and evolving strategies have significantly enhanced the efficiency of the upstream industry.
Essentially, the industry can achieve the same output as before but at a much lower cost. Despite the decrease in investments, activity and production have remained healthy and comparable to levels observed between 2010 and 2014.
Espen Erlingsen, the head of upstream research at Rystad Energy, said “Contrary to popular opinion, the world is investing appropriate amounts of money in fossil fuel production to satisfy demand. Cost savings mean operators can produce the same amount of oil at a lower cost, and we don’t foresee an oil supply crisis due to underinvestment on the immediate horizon.”
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Global upstream investments reached nearly $900 billion in 2014 before declining to approximately $500 billion in the aftermath of the 2015 oil-price collapse.
The COVID-19 pandemic and subsequent oil-price crash caused another dip in 2020, with investments plummeting to $400 billion. However, investments rebounded to around $500 billion last year as oil and gas activity recovered.
However, investments in 2022 amounted to only 60 percent of the 2014 levels, solely focusing on the declining investment trend overlooks falling unit prices and efficiency gains.
The report highlights how unit prices for different supply segments have decreased by 20 to 30 percent since 2014, resulting in increased activity for every dollar spent. Thus, a comprehensive analysis should consider these factors instead of solely focusing on investment decline.
Another significant metric is the number of completed wells per year, which peaked at approximately 88,000 in 2014. Similar to investment levels, the number of wells declined between 2014 and 2016 before recovering until 2019 and then dropping due to the pandemic. Last year, around 55,000 new wells were drilled, representing a 35 percent decrease compared to 2014.
To provide a more accurate assessment of upstream activity, Rystad Energy evaluates the expected resources from wells over their 30-year lifespan, considering efficiency gains and portfolio changes. This analysis shows that even during the period of declining investments and well counts from 2014 to 2016, developed resources decreased at a slower rate, indicating that the most productive wells were still being drilled.
The oil resource potential for wells completed in 2022 was nearly 32 billion barrels, only 15 percent lower than in 2014. The report predicts further growth, with the value expected to reach nearly 35 billion barrels in 2023, driven mainly by US tight oil and deepwater fields.
By comparing the total resources by completion year to annual production, the trajectory and sentiment of the market become evident. In an expanding oil market with rising demand, newly developed resources should surpass total production as the volumes from new wells are produced over time.
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