(EnergyAsia, September 29 2015, Tuesday) — The world will have to brace for sharply reduced oil and gas investments in the long term as the industry slashes capital expenditure in response to protracted low prices, according to separate analysis by a US government agency and two private firms.

The Energy Information Administration (EIA) said sustained low oil prices will deter the industry from making large investments in exploration and production activities that will restrict supply in the long term.

“Upstream investment is highly sensitive to changes in oil prices,” the EIA said. Since oil prices began collapsing in mid-2014, upstream investment levels are likely to fall significantly below the average of the past 10 years.

 

Oil production is a capital-intensive industry that requires management of existing production assets and evaluation of prospective projects often requiring years of upfront investment spending on exploration, appraisal, and development before reserves are developed and produced.

In 1981 and 1982, after crude oil prices fell significantly, the EIA found that investment topped out at more than US$100 billion (in 2014 dollars) and then averaged US$30 billion to US$40 billion per year over the next two decades when crude oil prices traded in the US$20-$30 per barrel range.

From 2003 to 2014, investment spending surged from US$56 billion to a high of US$158 billion as crude prices increased from an average US$34.53 to US$87.39 per barrel, including several months when they exceeded US$100 per barrel.

In its 2015 Annual Energy Outlook, the agency is projecting the US crude price to average US$70 in 2020.

“This could result in substantially lower annual oil and gas investment over the 2015-20 period than the annual average of US$122 billion spent during the 2005-14 investment cycle crest,” it said.

Last year, oil and gas investment represented one percent of the nation’s gross domestic product, while its US$1.5 trillion worth of fixed assets represented around 3.8% of total private fixed assets. The industry’s investment spending of US$158 billion accounted for 5.7% of the US total.

When real US oil prices hit their highest average of US$94.20 per barrel in the in 2012-14 period, the industry’s US$458 billion fixed asset investment represented 5.8% of the nation’s total over the three-year period.

“During a comparable period of high oil prices (1980-82), oil and gas fixed asset investment was $314 billion, or 8.1% of US private fixed asset investment, adjusted for inflation,” said the EIA.

Apart from the oil price, the industry’s upstream investment decisions are also influenced by the state of its existing assets, cost, risk and the technical complexity of the projects in its portfolio.

In reviewing project proposals, companies will consider factors like financial metrics, alignment with their priorities, project timelines and deadlines, market prospects and the state of competing projects.

Earlier, consultant Wood Mackenzie added to the bearish outlook for the liquefied natural gas (LNG) market by forecasting that enough capacity is being built to meet global demand through 2022.

Through 2016, the firm expects the industry to give final investment decision (FID) approvals for projects totalling as much as 100 million tonnes of new capacity. This alone will extend the fuel’s oversupply in Asia through to 2025.

But Noel Tomnay, the firm’s vice president for global gas and LNG research, said that despite the worsening glut and China’s weakening demand, most companies are expected to push through their FID approvals.

“Global LNG supply is presently around 250 million tonnes/year) and there is a further 140 million t/y under construction. Recognising that the global market will struggle to absorb such a large supply uptick, for some time now we’ve been forecasting a soft global market,” he said.

Now add Asia’s weakening demand to that bearish supply prognosis.

“China’s LNG import commitments are set to rise by 17% year-on-year between 2015 and 2020, from 20 million t/y to 41 million t/y but China will struggle to take all this LNG so quickly,” said Mr Tomnay. Already, the country’s LNG imports were down almost four percent in the first half of 2015, reflecting subdued industrial output and fuel competition from cheap oil.

“With lower industrial output and power generation competition increasingly characterising other key Asian LNG markets, like South Korea, Asian buyers are not in a hurry to finalise new LNG contracts,” he said.

Affirming Wood Mackenzie’s finding of a growing LNG glut, Qatar National Bank (QNB) said it expects global supply capacity to surge by over 20% from 245 million tonnes last year to 297 million tonnes in 2017.

It said more than the industry is completing 100 million tonnes of new capacity with another 600 million tonnes in different stages of planning and consideration. Most of the proposed projects in different parts of the world won’t see the light of day owing to the prolonged weakness in energy prices and the weak demand outlook.

The bank expects Qatar to out-do the competition as its 74 million t/y capacity has the lowest cost base and a commanding 31% share of the global LNG market.

QNB said it expects 12 million tonnes of capacity to come onstream next year and another 33 million tonnes in 2017.