guardian | The latest data from the International Energy Agency (IEA) and other sources proves that the oil and gas majors are in deep trouble.
Over
the last decade, rising oil prices have been driven primarily by rising
production costs. After the release of the IEA's World Energy Outlook
last November, Deutsche Bank's former head of energy research Mark Lewis noted that massive levels of investment have corresponded to an ever declining rate of oil supply increase:
"Over the past decade, the oil and gas industry's upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance."
Since 2000, the oil
industry's investments have risen by 180% - a threefold increase - but
this has translated into a global oil supply increase of just 14%.
Two-thirds of this increase has been made-up by unconventional oil and
gas. In other words, the primary driver of the cost explosion is the
shift to expensive and difficult-to-extract unconventionals due to the peak and plateau in conventional oil production since 2005.
The increasingly dislocated economics of oil production
According to Lewis, who now heads up energy transition and climate change research at leading investment firm Kepler Cheuvreux:
"The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy."
The IEA's new World Energy Investment
Outlook published last week revised the agency's estimates of future oil
industry capital expenditures out to 2035 even higher, from $9.4
trillion to $11.3 trillion – an increase of 20%.
Oil prices could
in turn increase by $15 per barrel in 2025 if investment does not pick
up. Most of the investment increase required would be devoted not to new
sources of production, but "to replace lost production from depleting
fields," said Lewis.
In the IEA's own words:
"More than 80% of this spending [of between $700 and $850 billion annually by the 2030s] is required just to keep production at today's levels, that is, to compensate for the effects of decline at existing fields. The figure is higher in the case of oil (at close to 90% of total capital expenditure)."
But as Lewis pointed out, the "risk of
insufficient investment" is not a hypothetical matter that might occur a
decade from now, but is "already today a clear and present danger" as
most of the oil and gas majors have revised down their plans for capital
expenditure in recent months.
