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Abu Dhabi, UAESunday 16 December 2018

Oil investment is recovering though Aramco’s Nasser warns of crunch

Oil investment is turning around, at least for conventional projects sanctioned by the big international oil companies; but there may still be a shortfall down the road after the loss of $1 trillion during the downturn

Aramco's Wasit gas plant in Saudi Arabia. Picture courtesy Saudi Aramco
Aramco's Wasit gas plant in Saudi Arabia. Picture courtesy Saudi Aramco

Oil industry investment is recovering. Even so, Saudi Aramco’s chief executive is still warning there is a looming supply crunch down the road on current trends.

The oil consultancy Wood Mackenzie yesterday reported that the number of conventional oil developments (that is, other than US shale oil) to be greenlighted, is on track to double this year after more than halving in the 2014 to 2016 period, during which oil prices fell by about 60 per cent.

“The upstream industry is continuing on the road to recovery,” says Angus Rodger, an upstream analyst at Woodmac and the report’s author. This year “marks a turning point,” he added, with final investment decisions (FIDs) expected on about 25 major conventional oil developments, compared with 12 last year.

But on Monday, Amin Nasser, the chief executive of Saudi Aramco restated his warning about under-investment.

“About US$1 trillion in investments has been lost in the current downturn, concurrent [with] growing oil demand and the natural decline of developed fields,” Mr Nasser said in a speech in Istanbul. “Conservative estimates suggest we need about 20 million [additional] barrels per day over the next five years to counter these effects,” and current investment won’t be enough to meet it.

So, is the oil industry going to be able to meet rising demand or is it heading toward another crunch?

Mr Nasser, in fact, was citing last year's Woodmac report estimating that $1tn of planned oil projects had been canceled, postponed or otherwise shelved through 2020. Woodmac analyst Malcolm Dickson says he sticks by that assessment.

Mr Rodger notes that the investment getting the go-ahead this year tends the relatively low risk variety.

Typical was Liza Phase 1, a development off the coast of Guyana that was given the final go-ahead last month by operator ExxonMobil. The field, which lies in more than 1,500 metres of water, 190 kilometres northeast of the the South American country’s Atlantic coastline, will cost about $4.4 billion for its partners, which apart from Exxon’s 45 per cent operator’s interest, includes Hess, with 30 per cent, and a Cnooc Nexen joint venture, with 25 per cent, and is an addition to a much larger development.

Eleven of the 15 FIDs taken so far this year have been for brownfield developments, building off existing infrastructure and extending older projects. “Not only are these projects less risky than greenfield developments, they also tend to be less capital-intensive and are quicker to bring onstream, offering a quicker payback and better returns on development dollars," Mr Rodger says.

The big private-sector international oil companies have cut costs substantially to preserve cash and they can be selective about which of their large cache of projects they can finance. “We are beginning to see them leverage their financial strength to push forward the very best projects in that extensive pipeline,” Mr Rodger says. But elsewhere, he adds, “we are seeing small to mid-caps in the international sphere and the [national oil companies] in particular, especially in Asia, continue to stay cautious and pull back from major new project investments.”

So, what is the bottom line?

“We don't see a shortage of oil or gas supply in the near term, as there are abundant low cost sources of supply available around the globe,” says Mr Rodger.

That picture might change further down the road.