Slowdown in Oil Finds Raises Alarm Over Supply Gap Ahead
Zacks
Zacks Equity Research
August 30, 2016Comment
The Oil and Gas sector continues to remain in troubled waters with a new report mentioning that in 2015 explorers had managed to discover only about 10% of the average level of oil found annually since 1960 and the level is expected to decline even further. This has raised apprehensions that the amount of oil discovered might be too less to meet future demand.
Oil prices have more than halved since the commodity prices started tumbling two years ago. As a result, drillers have cut their exploration budgets enormously, which in turn, has resulted in discovery of just 2.7 billion barrels of new supply. Per the figures from Edinburgh-based consulting firm Wood Mackenzie Ltd., this is the lowest level since 1947. As of the end of last month, drillers found just 736 million barrels of conventional crude.
Per the U.S. Energy Information Administration, global oil demand is expected to grow to 105.3 million barrels in 2026 from 94.8 million barrels a day in 2016. However, the slowdown in the discoveries has raised questions regarding the ability to meet this increasing demand. Though the U.S. shale boom has the potential to make up for the difference, prices locked below $50 a barrel undermine the possibility of growth in the area.
Wood Mackenzie reported that global spending on exploration – seismic studies to actual drilling – has been lowered to $40 billion in 2016 from about $100 billion in 2014. The spending level is expected to remain flat through 2018. Moreover, through August this year only 209 wells were drilled as against 680 in 2015 and 1,167 in 2014. This compares unfavorably with an annual average of 1,500 in data from 1960.
The low exploration data indicates that production might be obstructed few years down the line, which in turn, would push up the oil prices. Currently, oil prices are hovering around $50 a barrel that is less than half their 2014 peak. In a Saudi Arabia-led strategy to augment market share, the Organization of Petroleum Exporting Countries (OPEC) decided to continue pumping without limits. This pushed down the U.S. production to a two-year low.
According to the CEO of Royal Dutch Shell plc RDS.A, oil companies will need to invest about $1 trillion a year to continue to meet demand. The CEO expects demands to rise by 1 million to 1.5 million barrels a day, with about 5% of supply lost to natural declines every year.
The persistent weakness in prices has forced explorers to find new resources that are less risky as well as cheap. As a result, these companies are focusing more on appraisal wells on already-discovered fields and less on frontier areas such as the Arctic. Companies that have abandoned exploration in Alaska last year include Statoil ASA STO and Royal Dutch Shell.
ExxonMobil Corporation (XOM) has also decided against investing further in the proposed Alaska LNG facility. The other stake owners in the project are BP plc BP and ConocoPhillips COP holding 20% each. These companies too have indicated their possibility of withdrawing from the project.
