October 28, 2019 | Energy & Utilities
There is a palpable sense of uncertainty around the supply of crude oil. The increase in global oil production thanks to the shale oil revolution led to a significant drop in crude prices in 2014. This in turn led to a decrease in the number of approved upstream projects and a decline in investments in the oil and gas industry. Historically, the market for crude oil was kept in equilibrium by new sources of supply coming online to meet increased demand. However, while the demand for crude has been rapidly increasing in recent years, declining investments and the absence of upstream projects means that there fewer new sources of oil to meet this demand and the threat of a supply crunch is looming. This supply deficit is expected to bring increased volatility around crude oil prices.
The Threat of Deficit
According to the World Oil Organization (WOO) and World Economic Outlook (WEO), global oil demand is expected to increase by 7.5 million barrels per day till 2025. In the absence of capital investment into existing fields, current sources of supply — which includes conventional crude oil, natural gas liquids, tight oil, extra-heavy oil, bitumen and processing gains — are expected to drop by over 45 million barrels per day during this same period. This phenomenon is also referred to as a natural decline in supply.
If oil and gas companies continue to invest in existing oilfields — performing maintenance and making modifications to keep them running — but do not to make investments in new fields, the decline in supply will be closer to 27.5 million barrels per day. This phenomenon is known as an observed decline. By combining the expected daily increase in demand of 7.5 million barrels with the observed decline of 27.5 million barrels, we can arrive at the conclusion that oil and gas companies must invest in new fields to increase global production by 35 million barrels per day to stabilize the looming supply-demand gap.
Filling the Supply-Demand Gap
There are multiple approaches being taken to fill the supply-demand gap, ensuring that an additional 35 million barrels of crude oil per day are added to the global production line. Approximately 11 million barrels per day are expected to come from conventional projects that are already under development in conventional natural gas liquids, extra-heavy oil, bitumen and tight oil. Another 11 million barrels per day will be filled by U.S. shale liquids, which includes tight crude oil, tight condensates and tight natural gas liquids. Finally, the remaining 13 million barrels per day will have to be filled by new conventional crude oil projects that are currently under review and have not yet been approved.
While these numbers may make it look like there might not be a supply crunch after all, there are other concerns that arise when we look at the potential availability of different types of crude. The production of light crude oil has been on the rise, increasing by 160,000 barrels per day between December 2018 to June 2019. During the same period, the supply of medium crude oil has decreased by 1.5 million barrels per day. This significant decrease in the production capacities of medium crude oil increases the inherent uncertainties of the potential supply crunch. Meanwhile, the heavy crude oil industry has seen supply drop by 640,000 barrels per day between December 2018 to June 2019. Thus, we can end up in a situation where some types of crude are in abundance while other variants end up in a supply-demand crunch.
So, will there be a real oil shortage? Looking at the bigger picture, it is evident that there will be no crude oil shortage in the next few years, especially for light crude oil. The real problem areas are expected to come from medium and heavy crude oil, which have seen production capacities drop by 2 million barrels per day since the end of 2018 has. This raises several concerns for the oil and gas industry. It is imperative for the major oil and gas companies to start investing in more medium and heavy crude oil projects, particularly before prices start to escalate. More importantly perhaps, is that they should keep investing in these new projects even with a lower break-even price.