Global oil and gas development spending needs to increase by around 20 per cent to meet future demand growth and ensure companies sustain production in the next decade, according to Wood Mackenzie, a UK-based energy consultancy group
Malcolm Dickson, director, upstream oil and gas, said, “Companies will need to start investing again to sustain their business. But decision-making will be fraught with uncertainties, the oil price and energy transition not least among them.”
Wood Mackenzie’s research shows that the recovery is much slower and shallower than in previous cycles. Development spending will increase by 5 per cent this year, after a 2 per cent rise on 2017.
“Investment rises from a low of US$460bn in 2016 to just over US$500bn in the early 2020s-far below the US$750bn peak in 2014,” it said.
Tom Ellacott, senior vice-president, corporate research, said, “Four years of deep capital rationing have had severe impacts on resource renewal, especially in the conventional sector. Companies are rightly cherry-picking the best conventional projects in their portfolios for greenfield development. But not enough new high-quality projects are entering the funnel to replace those that have left.”
A new investment cycle
Wood Mackenzie estimated that annual development spend will need to increase to around US$600bn to meet future demand for oil and gas through next decade.
“Many companies will justifiably be concerned about committing substantial capital to long-term projects with peak oil demand and energy transition risks within the investment horizon. There's also a prevailing mindset of austerity designed to appease shareholders-investment is lower in the pecking order for surplus cash flow than dividends and buy-backs, Ellacott said.
According to the research, bigger and better conventional projects will ultimately be required. Around half of the reserves in the pre-FID project dataset need oil prices above US$60 per barrel to achieve a 15 per cent return – in this disciplined world many companies are screening new projects on long-term oil prices well below spot.
Further progress in project re-scoping, digitalisation and better fiscal terms will all need to play their part in getting these projects over the line, Mackenzie’s research concluded.
