Despite increasing renewable energy in recent years and an ongoing push to reduce greenhouse gas emissions, oil and natural gas are likely to remain a major part of the world's energy mix for the next at least 15 years, veteran industry observer and long-time Hess Corp. CEO John Hess said March 11.
Barring a radical new technology breakthrough, oil and gas are likely to still comprise about half the energy mix in 2040, Hess said during a panel on oil company strategies amid a changing industry at 2019 CERAWeek by IHS Markit.
But the upstream industry is not investing enough, and the volatility of oil prices have caused producers to shy away from raising their capital budgets, Hess said.
"The biggest challenge ... especially after having a bear market for three years where oil prices were $40 per barrel to $50/bbl, is how to invest more even though internal cash flows have been stressed quite a bit," he said.
Hess cited the International Energy Agency's estimates that the world needs to invest $580 billion per year to keep global oil and gas growing enough to meet demand and offset production declines. Three years ago, $350 billion per year was spent; two years ago, $370 billion was spent; last year, $410 billion was spent; and the estimate for this year is $420 billion.
Oil prices spent much of 2018 above $60/bbl and even reached the mid-$70s in October 2018. But by the end of the year, prices were in the mid-$40s/bbl — at a time oil companies were mapping out their capital expenditure plans for 2019. To be on the safe side amid volatile oil prices, and also keep their pledge to return more profits to shareholders, operators are keeping activity and spending flat to slightly up.
Flattish capex in 2019 unlikely to bring down production
But that is not likely to tamp down U.S. production much, since most large independents can grow their production in the high single- to low-double-digits at oil priced near $50/bbl.
The reason: ever-more efficient wells, improved by continued operational efficiencies, better drill-bit placement and redesigned well completions.
The result of those actions has been an astonishing oil production growth despite crude prices which just a handful of years ago would have not been deemed sufficient to yield a profit. On Monday, ICE May Brent settled up 84 cents at $66.58/bbl and NYMEX April WTI was 72 cents higher at $56.79/bbl at market close.
U.S. oil production, of which nearly 70% comes from shale, is currently around 12 million bbl/d. Between December 2017 and December 2018, U.S. production grew 1.8 million bbl/d, according to the U.S. Energy Information Administration. This year may see a bit less growth from the fourth quarter of 2018 to the fourth quarter of 2019 of just under 1 million bbl/d.
But the astonishing growth of shale oil masks a lack of investment in long-cycle projects. Although companies are becoming interested in more conventional oil projects again, and an IEA report released March 11 suggests spending on those projects is poised to grow this year, the Gulf of Mexico is one example of a left-behind basin in the wake of industry's shale rush to the onshore in recent years.
In 2004, 8,800 leases were licensed to oil companies, whereas today, the number is 2,500, Hess said. That is down more than 70%.
"I'd venture to say the [U.S.] Gulf of Mexico itself is on life support," he said. "We're not putting enough money back in to grow supply five [to] 10 years from now."
However, that arena's oil production is growing thanks to relatively quick tiebacks, or hookups of new discoveries to nearby existing production hubs. That avoids years of lead time and construction of new massive, multibillion-dollar stand-alone facilities before first oil.
U.S. Gulf of Mexico oil output, which averaged about 1.58 million bbl/d at midyear 2018, is currently just below 2 million bbl/d and should average nearly 2.5 million bbl/d by end-2020, according to EIA estimates.
That is due to recent new fields coming online or ramping up such as Chevron Corp.'s Big Foot field, which came online late last year.
Hess is one of several large operators that have announced plans for expanded U.S. Gulf activity.
Starr Spencer is a reporter at S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.