Wood Mackenzie Cautions 4.5 MMbpd Oil Shortage Looms

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A report by Wood Mackenzie has warned the world may face a daily oil shortage of 4.5 million barrels by 2035. The amount represents around half of the global consumption estimate of the International Energy Agency (IEA) for 2016. In other words, a true crisis is looming—and for the moment, there is no apparent way around it.

The most obvious reason is that energy companies don’t want to spend money on exploration when prices are so disappointingly low. Many of them simply can’t afford to spend on exploration if they want to survive in today’s price environment. Ironically, their long-term survival can only be guaranteed by further exploration spending.

A lot of costly projects have been shelved since the summer of 2014 when oil prices started falling, with the initial investments basically written off. Reviving these projects will cost more money. Where this money will come from is unclear—there is no certainty where oil prices are going in the near term, let alone any longer period, and the European Commission today forecasted $41/barrel oil for the rest of this year and just over $45 for 2017.

Another part of the answer to the question, “How did we get ourselves into this mess?” has to do with the knee-jerk reaction of E&Ps in times of crisis. That knee-jerk reaction is generally “fire at will”. Layoffs in oil and oilfield services are piling up at speed, well into six-figure territory to date. Cost-cutting has become the daily mantra of oil companies, and it’s easy to see why.

Oil dived more than 75 percent over a year and a half – that’s a hard blow to withstand. However, those laid off as part of the E&Ps’ coping mechanism will not sit around and wait to be rehired at the first opportunity. They will, and do, look for work elsewhere. So, the energy industry is facing another shortage that will help determine the ultimate one: a shortage of manpower.

The third part of the problem is reserves replacement. New exploration is not just a form of art for art’s sake, or a means of expansion to boost bottom lines. It’s an essential part of the operations of an oil business. Oil is finite, and in order to stay profitable, an oil company needs to maintain a consistent rate of reserves replacement.

And here’s more bad news: Last year, the seven biggest oil companies in the West only replaced 75 percent of their reserves. This is seriously bad news, especially combined with the fact that many new discoveries made in the last four years have disappointed.

Wood Mac’s exploration research vice-president told Offshore magazine that “In the last four years the industry has seen disappointing – largely gas prone – exploration results, with the volume of liquids discovered annually falling from around 19 billion barrels between 2008 and 2011 to 8 billion barrels between 2012 and 2015.

What’s more, Latham said that he expected new exploration investment to average $40 billion globally over the next three years. That’s less than 50 percent of what E&Ps invested between 2012 and 2014.

Is there a solution? Efficiency improvements could help in the short to medium term. After all, there are still quite a lot of reserves available and if efficiency improves, they could be utilized more fully.

For the long term, however, Big Oil – any oil – needs to open its coffers and scrape what’s left in them to pay for new exploration and keep its fingers crossed that the results are good.

Another way forward is going into renewables. However, despite global ambitions for a renewable revolution, this is not likely to happen. The move to renewables is, and will continue to be, more of an evolution and a slow one at that. Diversifying into renewables is a logical way to use available opportunities.

The global oil industry is changing—not of its own will, but nevertheless radically. Wherever oil prices go from here, E&Ps will need to find new ways to stay on top of things. Many of them will inevitably go under. Those that survive will be the lean, flexible ones.

By Irina Slav for Oilprice.com