How are low oil prices affecting investment in the sector, and what will be the impact on oil supply? What technologies are most influencing the sector now, and will a shift to renewables change change the situation significantly? Neil Atkinson, who as the Head of the IEA Oil Industry & Markets Division is also the editor of both the monthly Oil Market Report (and the annual Medium-Term Oil Market Report, answers these questions in an interview published on the IEA website.
What are the possible consequences of the current lack of investment in oil projects?
Low oil prices have squeezed capital investment hard. Last year the IEA saw a 24 percent drop in global capex, and this year we expect a further decline of 17 percent: the first back-to-back annual declines since 1986. And it could get worse as companies continually review their spending plans. The cutbacks are mainly concentrated in high-cost projects in countries such as Canada, Brazil and Russia. However, the cuts are not limited to capital expenditure, or capex: operating expenditure is being cut even in lower-cost areas such as the Middle East. Such are the budgetary pressures affecting their economies that oil industry cutbacks are necessary to fund politically important social expenditure.
This retrenchment will lead to slower oil supply growth around the world. In the meantime, in our 2016 Medium-Term Oil Market Report weanticipate global oil demand growing by an average of 1.2 million barrels per day (mb/d) to 2021. To satisfy this growing appetite, investment must be made both to sustain existing oil production and to provide the necessary new capacity. If the investment cutbacks continue for even longer than we currently anticipate, there is a risk that oil prices will spike, threatening economic growth.
How have new technologies and processes improved extraction? What are some of the most successful technologies/projects?
Let’s look first at one sector’s laser-like focus on procedure and cost. The drop in oil prices has slammed the brakes on US light tight oil (LTO), with production slipping below the year-earlier level for the first time this past December. This freezes five amazing years of development, with the average 4.3 mb/d output of last year roughly ten times that of 2010. That unprecedented surge required enormous effort, including the drilling of more than 55 000 new wells, with more than 1 500 drilling rigs running concurrently at the peak, compared with an average of 103 in Saudi Arabia.
By early this year, the number of US drilling rigs was down to just 440, but oil production has not fallen nearly as quickly as the rig count would suggest. Instead, the LTO industry drew on its experience during the rush to improve well performance, with initial production rates up to 23% higher than in 2015. Best practices, more efficient rigs and a severe squeeze on service and material spending have continued to reduce well costs, with companies reporting savings of 25% to 30%. While we expect a 50% reduction in LTO oil well completions this year from last, the flexibility and cost-consciousness of operators leaves the industry ready to shift back into high gear relatively soon when higher prices allow.
But only fundamental changes in technology can lower unit costs for good. Despite continued technological improvements, our World Energy Outlook’s New Policies Scenario sees production costs rising in real terms to 2040 as oil producers develop ever more technically challenging (and generally smaller) reservoirs. But when prices do recover, producers might see a more certain return on investment, and sooner, if they focus on additional recovery from existing fields or smaller-scale modular development of new discoveries, rather than pursuing vast, expensive megaprojects.
What do you think might be the impact of a move to renewable energy sources, in the wake of the COP21 agreement, on investment in oil projects and/or new technologies?
One of the key messages the IEA brought to COP21 was the critical need to accelerate energy technology innovation to make decarbonisation cheaper and easier. Specifically, as the World Energy Outlook Special Report on Energy and Climate Change urged ahead of COP21, investment in renewable energy technologies in the power sector must increase from the USD 270 billion of 2014 to USD 400 billion in 2030.
So the IEA warmly welcomed Paris Agreement to limit global temperature change to well below 2°C. But we know that the transformation inherent in the commitment agreed at COP21 represents a profound challenge to a fossil-fuel-dominated energy system. For one, ourWorld Energy Outlook’s 450 Scenario, which posits policies for limiting greenhouse gas emissions, shows that oil prices in all probability will be lower. Upstream megaprojects very likely will face considerably higher risks, while the sector will find it harder to attract new skilled professionals.
But a secure and least-cost shift to a low-carbon future via a demand and emissions trajectory like the 450 Scenario’s still requires continued large-scale investment in oil and gas. That’s because even if demand for oil declines sharply and that for gas increases only moderately during the transition, we need investment to compensate for the two-thirds decline in output from current fields, a far more rapid decline that anything seen (or foreseeable) on the demand side.
A particular hazard for oil and gas companies may lie in inconsistent climate-change policies, which would lead to substantially more market disruption, price volatility and a higher risk of stranded investments.