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Page added on January 26, 2019

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Is An Oil Supply Crunch Looming?

Consumption

The global oil and gas industry is poised to increase spending this year, albeit modestly, in a bid to boost supply after a punishing period of low oil prices. The industry has succeeded in cutting costs and speeding up project timelines, achievements that will help companies adapt to a market that may never return to the price highs seen prior to the 2014 meltdown.

The dramatic slimming down over the past half-decade by the oil and gas industry has led to a steep drop off in spending, exploration and final investment decisions (FIDs) on new projects. That has thinned out the pipeline of new projects set to come online in the years ahead, raising the possibility of a supply crunch in the early 2020s.

The global oil industry needs to come up with 35 million barrels per day (Mbd) of fresh supply between 2017 and 2025 in order to compensate for rising demand and natural decline from existing oil fields

Supply shortfall
The global oil industry needs to come up with 35 million barrels per day (Mbd) of fresh supply between 2017 and 2025 in order to compensate for rising demand and natural decline from existing oil fields, according to the International Energy Agency’s (IEA) 2018 World Energy Outlook. Projects that are already under development could add roughly 11 Mbd over that timeframe, the IEA said in November. Additionally, the IEA said U.S. shale liquids could add another 7 Mbd of new supply, although it would require a heroic effort to achieve – the rate of production growth over the ten-year period of 2015 to 2025 would slightly exceed the ramp up in Saudi Arabia between 1967 and 1977, making it the “fastest rate of growth ever seen,” the IEA said.

Even if that is achievable, there would still be a supply gap. Much of the remainder would, in theory, come from yet-to-be sanctioned conventional projects. The IEA says that if the oil industry announces FIDs on projects covering 16 billion barrels of oil reserves each year, it can come up with 13 Mbd of additional production by 2025. However, the problem is that the industry is not sanctioning projects at that rate. Instead, since 2014, only 8 billion barrels of oil reserves have been sanctioned on average each year. “The volumes of conventional crude oil receiving development approval would therefore need to double from today’s levels, alongside robust growth in other sources of production, if there is to be a smooth matching of supply and demand,” the IEA said.

If project approvals remain tepid, however, the gap could potentially be made up by leaning even harder on U.S. shale. The resource base theoretically exists to support 20 Mbd of U.S. liquids production by 2025, the IEA says. “However increasing production to this level would require a level of capital investment and a number of tight oil rigs that would far surpass the previous peaks in 2014,” the IEA warned. “It would also rely on building multiple new distribution pipelines to avoid bottlenecks that could prevent or slow the transport of oil away from production areas.”

“In other words, the U.S. needs to add one single Russia in seven years’ time in order to avoid a major tightening in the markets”

The IEA’s executive director Fatih Birol was more direct in an interview with CNBC in November. “In other words, the U.S. needs to add one single Russia in seven years’ time in order to avoid a major tightening in the markets,” he said, before adding, “It can happen but it would be a small miracle.”

The bottom line is that the damage to industry balance sheets stemming from the 2014 meltdown has forced a sharp cutback in new development, which sets the market up for a supply shortfall in the first half of the 2020s. A recent survey of industry executives finds that nearly three-quarters of respondents expect their companies to maintain or increase spending this year. However, capex in 2018 still was roughly 40 percent below the 2013 peak, according to Bank of America Merrill Lynch.

There is little sign that oil and gas companies are planning on returning to pre-2014 investment levels, particularly with heightened concern over cash flow and capital discipline. If the emerging supply gap won’t be closed by new sources of output, then demand will need to fall. In other words, the market is facing the possibility of a price spike in the years ahead.

There is little sign that oil and gas companies are planning on returning to pre-2014 investment levels, particularly with heightened concern over cash flow and capital discipline.

Lower breakevens
Not everyone agrees with this assessment. Significant cost declines have allowed new projects to move forward even in a lower price environment. For instance, in late 2016 BP and Chevron gave the final investment decision on the offshore Mad Dog phase 2 project. Originally, the project was expected to cost more than $20 billion, but a redesign following the price collapse resulted in a $9 billion cost estimate. Industry-wide, cost reductions have led to projects breaking even at much lower prices.

“Producers have also simplified and streamlined greenfield projects, driving breakevens below $40/bbl for a large majority of projects (ex US shale) coming online during 2019-24,” Bank of America Merrill Lynch said in a note on January 18. In addition to U.S. shale, the investment bank sees strong supply growth over the next few years from Brazil, Norway, Guyana and offshore Gulf of Mexico. “The aggregate capacity over the next six years is actually larger than 2013-18 when promising technical prospects are included.” After factoring in slower demand growth, new supplies may be sufficient.

The futures market offers some evidence to back up this story. Five-year Brent futures used to trade north of $90 per barrel, but are now in the low-$60s, which suggests that traders do not foresee a price spike on the horizon. Goldman Sachs has pushed a similar view, arguing that new Permian pipelines pave the way for another round of strong U.S. shale to grow in the next few years, which will allow OPEC to rebuild spare capacity. Goldman argues that long-dated WTI prices will fall towards $50 per barrel, a reflection of a market that is well-supplied in the years ahead.

There is a large gulf between the views of a looming supply crunch, as the IEA warns, and the “lower for longer” outlook represented by some major investment banks. Time will tell which is closer to the mark.

The Fuse



27 Comments on "Is An Oil Supply Crunch Looming?"

  1. print baby print on Sat, 26th Jan 2019 4:03 pm 

    I can not belive IEA dommer hahahhah. Finaly they are telling the true. They have done it earlier , now it is to late

  2. print baby print on Sun, 27th Jan 2019 4:42 am 

    They should have done it earlier . I apologies because of my poor English

  3. Cloggie on Sun, 27th Jan 2019 4:46 am 

    As long as western fatties consume up to 3800 kcal per day instead of the optimum 2500 kcal for a paper pusher and transport themselves in SUVs, economic downturn is only good for western health and the environment in general.

    https://en.wikipedia.org/wiki/List_of_countries_by_food_energy_intake

    #140 oil, bring it on!

  4. Cloggie on Sun, 27th Jan 2019 5:20 am 

    Large scale hydrogen project study in the works in Belgium, converting offshore wind energy:

    https://deepresource.wordpress.com/2019/01/27/large-scale-hydrogen-project-in-the-works-in-belgium/

    If you build large scale offshore wind energy parks you have no choice but to think about storage next.

  5. print baby print on Mon, 28th Jan 2019 1:38 am 

    https://finance.yahoo.com/news/tesla-faces-painful-dose-reality-141000795.html
    The second link shows a real problem
    this is very dangerous
    https://finance.yahoo.com/news/oil-producers-finding-growth-costs-140700403.html

  6. Antius on Mon, 28th Jan 2019 7:16 am 

    Interesting that one thread on this site is talking about a supply crunch and another, at the same time, is completely poo pooing the idea of geologically induced oil production constraints.

    I hate to be the bearer of bad news, but whilst industry capex spending is beneath the heady heights of the 2010-2014 era; it is still at least four times what it was in the late 1990s.

    https://thepeninsulaqatar.com/article/30/07/2016/GCC,-Iran-and-Iraq-to-see-higher-oil-output

    And since the turn of the century, global oil production in barrel terms has risen by a modest 40%; much of which is low grade condensates, which look far more impressive by volume than they do in terms of usable energy.

    Anyone with a sensible head on their shoulders will conclude that geological oil production constraints are very much alive and are taking a heavy toll on the finances of the oil industry.

    Geological supply limits will materialise when the world can no longer afford to pay energy prices that are far above long term trends. In the short term, the debt orgy unleashed by central bankers and governments across the world has given the illusion of sustainability. That illusion will come undone with the next financial crisis. At that point, geological oil production constraints will be difficult to ignore.

  7. TIKI on Mon, 28th Jan 2019 1:11 pm 

    35,000,000? Holy fucking shit that will NOT happen.

    Enjoy the next 5 years people after that life as we know it will change forever.

  8. Sunspot on Tue, 29th Jan 2019 5:46 pm 

    I’m gonna do you turkeys a big favor – I’m gonna tell you what will happen in the future. Don’t thank me…

    Oil is a finite, non-renewable resource. We started “running out” the day we pumped the first barrel out of the ground. Fact. So we will never actually run out – there will always be oil under the ground somewhere on the planet. Not the point. The true question is, when will the oil supply fail, in a serious way, to meet the demand.

    This has NEVER HAPPENED in the world. NEVER!! There have been short-term, regional shortages – which have been devastating, but solvable – but when the WORLD begins running short, someone will not get the oil they need and expected. Which means (gasp!) gasoline shortages! Oh No!

    Suppose you got up tomorrow and heard on the “radio” that there could be gasoline shortages soon in your area. What will you do? Hmmm? Of course, you have 1/4 tank, so you won’t worry about it, right?

    BULLSHIT!

    You’ll jump in the car, and go screaming to the nearest gas station and fill that tank! If you have any 5-gallon gas cans handy, you’ll fill those too! Don’t tell me you won’t. I WILL! Bet your ass I will!

    And when “everyone” does that – and you know they will – we will drain every gas station in the land. The average gas tank has about 1/4 tank right now. And nobody cares – we can get gas anytime, anywhere. But the fact is: THERE IS NOT ENOUGH GASOLINE IN THE COUNTRY TO FILL EVERY GAS TANK!!

    All it takes is an energy panic, and we will create what we fear, a gasoline shortage. And once that mentality is implanted in our heads, we will keep that gas tank filled at every opportunity. whether we will need it or not. I will.

    But the system can’t withstand that. We simply don’t make enough gasoline for everyone to have a full tank. We never have and never will. But once there are serious shortages of gasoline – which MUST happen someday – there will always be shortages. Human hoarding will guarantee it. It will likely lead to governmental control of all fossil fuels. There will be no choice.

    Enjoy your next fill-up. Someday you will remember it fondly.

  9. makati1 on Tue, 29th Jan 2019 6:07 pm 

    Sunspot, back up your bullshit with facts. Anyone can post crap. Davy does it all the time with no credible references.

    Are you a new Davy sock puppet. You cannot be MOB. He’s not that smart. So, back up your “We simply don’t make enough gasoline for everyone to have a full tank.” with facts, not sensationalism/fearmongering.

    US cars = ~260,000,000 (2016)
    US gas = ~260,000,000 barrels @ 42 gallons/bbl. (2019)

    That tells me there are at least TWO tanks of gas for every car in America today, in storage.

    https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WGTSTUS1&f=W
    https://www.statista.com/statistics/183505/number-of-vehicles-in-the-united-states-since-1990/

    Check your “facts” before you post or be shot down like above.

  10. Davy on Tue, 29th Jan 2019 6:33 pm 

    “Sunspot, back up your bullshit with facts. Anyone can post crap. Davy does it all the time with no credible references.”

    makato, you mean I neuter you with moderation. Big difference! I deal with facts you deal with packaged facts you fit into your narrow minded agenda, fool

    “Are you a new Davy sock puppet. You cannot be MOB. He’s not that smart.”

    makato, talk to your buddy. He is your sock master

  11. I AM THE MOB on Tue, 29th Jan 2019 6:36 pm 

    Mak

    I use references all the time..And from only mainstream or scholarly sources..And you will just make unfounded claims that they are propaganda or are being paid etc..

    Your days of sticking your head in the sand our coming to an end soon..

    I have shown you numerous studies that prove what is coming..Read my manifesto..The second to last slide..There are ten peer reviewed studies that prove the global economy and civilization are going to collapse over the next decade..

    https://medium.com/@Cliffhanger1983/the-collapse-of-civilization-manifesto-2039c6a5327

    Its going to be such a fast and hard collapse Guy McPherson will shit his paints!

  12. Duncan Idaho on Tue, 29th Jan 2019 6:45 pm 

    The United States seems doomed to repeat the mistakes that it made in Chile in 1973.
    (In Ven, of course)

  13. I AM THE MOB on Tue, 29th Jan 2019 6:45 pm 

    Mak

    You are a confused old man..Maybe you should take a nap and change your diaper..

    LOL

  14. I AM THE MOB on Tue, 29th Jan 2019 6:59 pm 

    Antius

    Nice comment..You are really stepping up your game lately..Keep up the good work.

    Clogg (inserts head into the sand)

  15. makati1 on Tue, 29th Jan 2019 7:03 pm 

    MOB, when you are ready to have a mature, intelligent, factual debate, reply. Otherwise keep warm and enjoy your worthless life, snowflake.

    Ah, the title fits today! I noticed that it is setting new records for freezing your balls off there in your neighborhood. A comfortable 77 and sunny here this morning. LMAO!

  16. I AM THE MOB on Tue, 29th Jan 2019 7:47 pm 

    Sunspot

    What an amazing comment..And so true..That will happen for sure..Look what happened during hurricane harvey..People were filling up rubermaid trash cans with gasoline..

    And the public is going to feel the boot of big brother soon..Whether its a left or right boot will make no difference!

  17. I AM THE MOB on Tue, 29th Jan 2019 7:51 pm 

    Mak

    Yes its cold but its supposed to warm up by the weekend..And I have lake michigan to jump in the summer..With my girlfriend and her bikini..

    Have fun with the chinky eyed people..

    LOL

  18. makati1 on Tue, 29th Jan 2019 8:43 pm 

    Dream on, MOB. Your GF is a blowup and Lake Michigan is never warm except for a short while in late summer. Not to mention the pollution there.

    “Billions of Gallons of Raw Sewage”
    “Chemical Contaminants”
    “Plastic and All other Non-Biodegradable Trash”

    http://blog.livnfresh.com/worst-poluttion-issues-in-lake-michigan/

    “U.S. Steel dumps more toxic chromium near Lake Michigan, faces lawsuit”

    https://www.chicagotribune.com/news/local/breaking/ct-lake-michigan-toxic-chromium-20171114-story.html

    The Pacific Ocean may have some pollution, but not as bad as your swimin’ hole. Or as cold.

    Mauban Sea Temperature (Today) 30th Jan 2019 26.7°C / 80°F

    https://www.seatemperature.org/asia/philippines/mauban.htm

    The temps only vary about 8-9F degrees year round. Ditto for air temps.

    Why do people pay big bucks to go to south seas resorts? Now you know why.

    Sunny and warm here. Going up to 80F. Typical day in the land of eternal summer. LOL

  19. I AM THE MOB on Tue, 29th Jan 2019 9:09 pm 

    Mak

    You don’t have swim in the lake..You can hang on the beach or go riding in a boat..

    There is a motto we say about lake Michigan

    “No sharks, no salt, no worries”

    Have fun beating off all year long..If you dick can even get up anymore (not likely)..

    LOL

  20. makati1 on Tue, 29th Jan 2019 9:57 pm 

    MOB, you always revert to your immaturity, instead of intelligence. You can call your pollution tub anything you want. Americans are so brainwashed they have no idea what the real world is like. You certainly don’t. You want to believe all the negatives the USMSM spews about the real world so you can pretend that the US is better. I think “exceptional” is the common lie.

    You don’t want to believe that my life and location is so much better than yours. So be it. I enjoy watching the US self destruct from the warm, clean beaches of the Philippines. And, yes, clean. The US likes to post old pics of Manila Bay, not the beaches of the other 7,000 islands. LOL

  21. Antius on Wed, 30th Jan 2019 12:18 am 

    A good post from Don Stuart on Tim Morgan’s website. Reproduced below.
    ………

    Art Berman tweet on the cost of drilling oil and gas wells:

    Cost of drilling oil & gas wells today is 3.7 times higher than 2002-2004 average. Cost has increased 18% since the oil-price collapse. Cost benefits since 2014 mostly from -42% drop in oil-field service costs, not technology. #OOTT #oilandgas #oil #WTI #CrudeOil #fintwit #OPEC pic.twitter.com/3vkUeXy…

    Art’s point on field service costs is that those companies are being squeezed by the recession in drilling…they aren’t magically getting more efficient.

    Yet the US has declared a big increase in reserves, putting the US reserve level at historical highs. Does anybody understand that rising ECoE implies necessary changes in lifestyle and financial vehicles? And, horribly, perhaps we can no longer afford such an expensive government?

    Don Stewart

  22. I AM THE MOB on Wed, 30th Jan 2019 12:50 am 

    I am not from Michigan you stupid old man. I am from Australia. You are so stupid. Stupid stupid stupid.

  23. makati1 on Wed, 30th Jan 2019 12:54 am 

    MOB, and you are full of bullshit. BTW: It is 1AM in the Chicago area. For years you say you are from the Great Lakes area … or is this just JuanP? LOL

  24. makati1 on Wed, 30th Jan 2019 1:05 am 

    But Antius, which country has its entire lifestyle built on cars and burbs? Which one is going to hurt the most in your scenario?

    And if one does not live in the US, why would they be as affected? I certainly will not be. My adopted country uses about 1/20th the FFs the US uses per capita.

    Gas here has never been below $4 per gallon in 10 years. Usually closer to $5. I have never owned a vehicle for the last 10 years. I gave my last car to my daughter in 2008.

    I travel by bus, jeepney, taxi, motor-trike or by foot. I do fly to the US to visit family occasionally, but that uses a lot less FFs than my old work routine.

    I soon will not go to the US at all, as it slowly closes its gates to travel. I don’t want to get trapped in the approaching civil war insanity.

    Oil can contract a lot and most non-Westerners will not miss it and will adjust to the new/old ways.

  25. Davy on Wed, 30th Jan 2019 6:31 am 

    This is for makato.

    “Getting boats to children who have to swim to school”
    https://tinyurl.com/yd4kvmv8

    “Imagine if going to school meant swimming and wading through water and mangroves, your school books tied up in a plastic bag over your head. All the while, you’re struggling to keep your face above water and fighting against the current. For some children in the Philippines, this is a daily routine – but a charity is trying to make it easier for them to get their education by providing communities with boats. The Yellow Boat of Hope Foundation started out as a small idea on social media yet over the years has become a countrywide charity helping school children in need.”

  26. Davy on Wed, 30th Jan 2019 6:39 am 

    “China Is Exporting Clean Energy With One Hand, Coal With The Other”
    https://tinyurl.com/y7nxw9ce
    (graph) https://tinyurl.com/y7yabccc

    “At the same time as China is leading the world in exporting green environmental goods and services and building up the globe’s largest renewable energy industry, the country is also simultaneously funding over a quarter of the coal plants currently under development outside of the country.”

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