Sustained low oil prices could lead to a long-term drop in upstream oil and natural gas investment, according to a new report by the US Energy Information Administration.
“Given the fall in oil prices that began in mid-2014 and the relationship between oil prices and upstream investment, it is possible that investment levels over the next several years will be significantly lower than the previous 10-year annual average,” the EIA said.
According to the EIA's 2015 Annual Energy Outlook Reference case projects real domestic first purchase prices to average about US$70/bbl in 2020. The agency says this price level could result in substantially lower annual oil and natural gas investment over the 2015-20 period than the annual average of $122 billion spent during the 2005-14 investment cycle crest period.
The EIA looked at historical data, and found that in 1981 and 1982, after crude oil prices significantly increased, investment topped out at more than US$100 billion (in 2014 dollars) and then averaged $30 billion to $40 billion per year into the early 2000s as crude oil prices fell and remained in the $20-$30/bbl range. From 2003 to 2014, investment spending increased from $56 billion to a high of $158 billion as crude oil prices increased from $34.53/bbl to $87.39/bbl, including several months of prices reaching more than $100/bbl.
The data reported by the EIA is similar to what OE heard at SPE Offshore Europe earlier this month.
Manouchehr Takin, a London-based international oil and energy consultant looked at a previous downturn in the 1990s to show the cyclical nature of the oil and gas industry and how low oil prices affect future investment.
Takin told Offshore Europe attendees: “Looking at the previous downturn in the late 1990s, OPEC had made a decision to ramp up production in 1997, despite a recession in the Middle East. That decision caused the price of oil to fall under $10/bbl in 1998.” Takin said it took two years for the price to go back up. But because of the lowered oil price, oil companies cut investments due to a lack of confidence in the market.
“So, there was five years of underinvestment by companies,” Takin said. “Based on the oil price collapse, companies didn’t have confidence price would go up. When they were doing project evaluations, their cut off was $14-15/bbl up until 2002-2003.”
Also, at Offshore Europe, Oil & Gas UK presented data showing a dramatic rise in UK Continental Shelf investment from £6 billion in 2010 to its peak of £14.8 billion in 2014.
Adam Davey, economics and market intelligence manager, Oil & Gas UK, told the Offshore Europe crowd that this investment is expected to fall at a rate of £3-4 billion over the next few years. He attributed the rise in spend due to recently sanctioned projects such as Clair Ridge, Schiehallion/Quad 204, Laggan-Tormore, Mariner, Golden Eagle.
“Many of those projects are not yet complete,” he said earlier this month. “The capital investment, some sanctioned 2-3 years ago, is still being spent in 2015, 2016 and 2017.
“There’s very little new fresh investment,” he said. “Without more investment, investment could go down to £4 billion per annum by 2017. The average is around £8 billion per annum.”
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