A cumulative $4.9 trillion of investments in global upstream oil and gas are needed by 2030 to meet market needs and and prevent a supply shortfall, even if demand growth slows toward a plateau, according to a report by the International Energy Forum (IEF) and S&P Global Commodity Insights.
The IEF said that 2022 upstream capex increased by 39% to $499 billion, the highest level since 2014 and the largest year-on-year gain in history.
Higher costs drove the increase as cost inflation was up 15–20% year-on-year in 2022, with more expected in 2023, the report said. However, activity has started to recover, with the global rig count up 22% from a year ago, but it remains 10% below 2019 levels, the report said.
Annual upstream investment will need to increase from 2022 levels to $640 billion in 2030 to ensure adequate supplies. The estimate for 2030 is 18% higher than what the group assessed a year ago “primarily because of rising costs,” the report said.
Balancing Sustainable Supply and Capital Allocation
Regarding supply, nearly 2.2 million B/D of new capacity was approved or sanctioned in 2022, falling short of 2019’s high.
The IEF said that companies continue to favor small, modular, or phased projects over megaprojects, adding that there no new greenfield megaprojects planned in the next 5 years despite higher prices.
“In contrast, almost 250 small- to medium-scale projects are expected to begin by 2030, assuming companies move forward with investment. These projects require less capital, have shorter payback periods, and are more insulated from long-term risks,” the report said.
Shell’s Vito field development project that recently started production and Murphy Oil’s King’s Quay floating production system project are just two of many examples of these small- to medium-scale projects.
As oil and gas E&Ps are experiencing record profits, capital availability is no longer the major constraint, capital allocation is, according to the IEF.
“While companies prioritize returns to shareholders, share buybacks, and debt repayment, they still have ample free cash flow that could jump-start upstream investment,” the IEF said. “The question is now, will companies re-invest, and if so, where?”
The IEF said that these company-level decisions to re-invest proceeds into upstream operations or divert windfalls to other ends will be “complex and depend on a number of factors including shareholder and stakeholder priorities, regulatory environment, existing operations, geography, and in-house expertise.”
As near-term economic headwinds continue to weigh on markets and investors, the IEF cautioned that if the world enters a recession this year, that oil demand growth could remain below trend for several years and could “potentially extend the post-pandemic demand stall to 5 years.”
While the near-term demand uncertainty and potential medium- to long-term consequences add to investment hurdles and deterrents, it does also provide what the IEF sees as a “valuable opportunity for upstream investments to catch supply up with demand.”
Wild Card, Price Volatility
The enormous uncertainty surrounding Russian production losses makes it the the big wildcard in the medium term, according to the IEF.
“This decade’s need for investment and new upstream projects will depend on how much Russia produces and invests,” it said.
The report assumes Russian production will decline by 1.1 million B/D in 2023 to 9.4 million B/D and then plateau at this level through the rest of the decade.
“The current energy price volatility harms consumers, investors, businesses, and governments,” the IEF said, adding that adequate investment is needed for stable markets now and in the future.
“Underinvestment threatens to undermine energy security in the short and medium term and it can also stall progress on climate goals by increasing reliance on more carbon-intensive options in the short term,” it said. “The vicious cycle of volatility and investment remains a key risk in the coming decade, with high price volatility deterring investment, and lagging investment potentially fueling volatility.”