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Analysis: Decline rates, spending crunch fuels fresh oil industry concerns

London β€” Industry scrutiny over the fallout from massive oil sector spending cuts on the global oil supply curve appeared to return this week as market watchers pick over the winners and losers in the ongoing battle with low prices.

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According to a new study by Bank of America Merrill Lynch Wednesday, Saudi Arabia, Iran and Iraq will need to fill a global oil supply gap in the coming years as non-OPEC oil producers increasingly struggle to maintain output levels as a result of huge spending cuts.

Capital spending by the global oil and gas industry has shrunk by more than 40% or $280 billion since 2014 in response to low oil prices and field decline rates have accelerated as a result, the bank said.

Average oil field decline rates outside OPEC have now risen to 5%, up from the 4.87% recorded in 2009, according to the bank, with Australia, the Netherlands, Canada, and Russia leading the recent acceleration. Regionally, the non-OPEC decline rates are accelerating particularly in the Middle East, OECD Pacific, and Africa but have held up better in Asia.

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"Given the large reduction in investment and drilling activity, we would expect non-OPEC decline rates to keep accelerating in the next few years," the bank said.

With over 90% of global oil production accounted for by conventional fields, average decline rates have been under close scrutiny since 2014 for clues to the scale of the potential supply impact. At 5% average decline rates, some 2.8 million b/d of new oil production would be needed just to replace non-OPEC field declines in 2016.

In December, Norwegian oil consultancy Rystad Energy warned of a new shortage of crude "a few years down the road" as a result of massive spending cuts by the global oil industry. Investment decisions to develop just 8 billion barrels of oil were taken by oil companies last year, less than a quarter of oil output that needs to be replaced every year from new projects, it said.

Patrick Pouyanne, CEO of French oil company Total, has also warned of a possible 10 million b/d global oil supply deficit by 2020 given forecasts of planned upstream projects and the additional capacity needed to cover natural field declines.

BP, for one, has made much of holding its field decline rates below average industry levels. Speaking on an earnings call Tuesday, BP's upstream chief Bernard Looney said BP's hopes of growing production capacity in the coming years in the face of low oil prices will be underpinned by keeping decline rates close to the 3% average they have seen since 2012.

BP is banking on bringing 800,000 boe/d of new capacity on line by 2020, as its readies its balance sheet to survive with $50-55/b oil. For planning purposes, however, the oil major acknowledges that future base decline rates could still rise up to 5% and no targets of actual production have been given.

DISCOVERY BLACK HOLE

In addition to rising decline rates, market watchers have expressed concerned over an apparent lull in new oil and gas discoveries, another factors which could accelerate the world's reliance on OPEC's oil.

In April, Wood Mac predicted a potential shortfall of 4.5 million b/d of global oil supply by 2035, unless discoveries exceed the current annual average of 8 billion barrels. According to the energy research group, the volume of conventional oil discovered over the past four years has more than halved compared with the previous four-year period, falling from 19 billion barrels/year to 8 billion barrels between 2012-15.

The sentiment was echoed by analysts from Tudor Pickering & Holt this week which noted concern over "anemic global exploration activity and low success rates."

The investment bank noted that most oil majors and a number of countries have failed to boost production from their conventional fields in recent years.

"After almost two years of capital starvation, the world's legacy production base is showing signs of wear and tear. Depletion never sleeps and the 60 million b/d not sourced from OPEC or onshore Lower-48 US shale is suffering from insufficient maintenance," the bank said.

Whether oil markets should be concerned over the recent slowdown in new oil finds and accelerating decline rates at existing fields depends on how capable OPEC's top Gulf producers are at developing their sizable conventional reserve base, according to Bank of America.

While higher output from Saudi Arabia, Iran and Iraq may prove the most likely source of new supply, questions remains over the capacity of the OPEC producers to fill the widening gap given current investment trends, the bank said.

Iraqi rig count have halved over the last two years while Saudi Arabia has barely increased drilling activity since oil prices tanked.

"The rig count in Abu Dhabi and Kuwait has increased, and that's a relevant shift. Yet the geopolitical and legal risks involved in dealing with Iran and even Iraq will likely limit investments in other sections of the Persian Gulf, in our opinion," the bank said.

Bank of America reiterated its estimates that global oil supplies will expanded by 200,000 b/d year-on-year in 2017 and retained its view that Brent will average $61/b next year.

--Robert Perkins, robert.perkins@spglobal.com
--Edited by Maurice Geller, maurice.geller@spglobal.com