The year 2020 has certainly been a wild one in all aspects of both society and the global economy, but has also left the global petroleum industry in disarray. When global oil demand eventually returns to pre-pandemic levels and ultimately continues to grow, will the world have enough crude to meet demand for the upward trajectory of energy consumption? According to Rystad Energy, the answer is no. They predict the world is on track to run out of sufficient oil supplies to meet its needs through 2050, despite lower future demand due to the COVID-19 pandemic and the accelerating energy transition. There may not be enough supply in the next 30 years unless exploration speeds up significantly and exploratory capital expenditures of at least $3 trillion is put to the task.
- Rystad Energy predicts that unless exploration for oil significantly grows, production will not be able to sustain demand through the year 2050. Even with reduced crude demand from the pandemic and the shift in energy allocation towards alternative energy sources, an estimated $3 trillion in CAPEX will be needed for meeting oil supply needs.
- Most global energy consumption over the next 30 years is anticipated to come from countries not currently in the Organization for Economic Cooperation and Development (OECD). Oil demand is expected to grow through 2030 before plateauing while natural gas will continue growth of 0.5% y/y through 2050. Renewable energy sources will show the largest growth rate through 2030, but crude oil and petroleum products still remain the largest contributors to energy consumption.
- Rystad estimates that about 313 billion barrels of production needs to be added to current producing reserves in order to meet demand anticipated in 2050. New discoveries of reserves need to account for 139 billion barrels to meet the required consumption. This will need to be done by either recovering additional reserves from existing fields or by finding entirely new reserves.
- Secondary recovery and technological advancements in existing fields historically has produced an incremental 5% resource improvement. This will create about 18 billion barrels, or 13%, of the necessary demand by 2050. An additional 121 billion barrels will still be needed through discoveries in undeveloped areas.
- Since not all new discoveries are economic to develop, about 25% of new reserves found in the next thirty years will be produced and consumed. This means 484 billion barrels of undeveloped resources must be found by 2050 to produce the 121 billion barrels needed to meet demand. This is easier said than done as global exploration success has dropped from 72% in 2010 to 17% in 2020.
- COVID-19 has caused an estimated drop in emissions from the energy sector equal to 2.5-years of pre-pandemic emissions. While a transition towards renewable energy sources will continue, the reduced emissions volumes will help oil and gas companies continue to operate while meeting government regulations.
- At current commodity prices, doubling exploratory efforts is impossible. Exploration companies have slashed their budgets due to limited capital, and a huge chunk of what has been sidelined are exploratory plans. While pain in the energy sector will continue for the near term, oil and gas will continue to be a vital pillar in the energy mix. Companies that make it through will be well positioned to usher in a new age of necessary exploration.
The year 2020 has certainly been a wild one in all aspects of both society and the global economy, but no industry was hit with a one-two punch quite like the global oil and gas industry. The dual black swan events of the global pandemic that decimated global petroleum demand and subsequent Saudi-Russia price war that sent oil prices into a tailspin have left the global petroleum industry in disarray. Luckily, historic actions taken by OPEC+ to bring significant portions of global production off the table helped stabilize markets in the short term, but the long term effects may have the opposite results. The question becomes: when global oil demand eventually returns to pre-pandemic levels and ultimately continues to grow, will the world have enough crude to meet demand for the upward trajectory of energy consumption?
Rystad Energy Proposition
In early December, Rystad Energy, a world renowned independent energy research and business intelligence company that provides energy consultancy to private and public actors, made the following proposition: “the world will not have enough oil to meet demand through 2050 unless exploration accelerates” . RARE PETRO has previously taken a similar stance in several past periodicals like Post-COVID Global Oil Demand Series – Part 4: Global Oil Demand and Opinion Piece: Fearing The Second Wave. The RP Team believes global oil demand will return in the near term and surpass its historic peak as the global consumption trend continues until an eventual peak mid-century. Rystad Energy has taken this a step further to postulate that as the world continues to consume more energy, oil supply at current rates in the world will not be able to meet demand in 2050. In the official report they predict that “the world is on track to run out of sufficient oil supplies to meet its needs through 2050, despite lower future demand due to the COVID-19 pandemic and the accelerating energy transition – unless exploration speeds up significantly and capital expenditure of at least $3 trillion is put to the task” .
Prior to the pandemic, it was almost universally accepted that total global energy demand would continue to rise through 2040 or 2050, and by association petroleum demand would also grow. While the pandemic has altered those projections as most now project peak demand to be around 2030, the world still agrees global demand will surpass pre-pandemic levels in the near future to continue its upward trajectory for quite some time. Back in 2019 the U.S. Energy Information Administration (EIA) projected world energy consumption will grow by nearly 50% between 2018 and 2050 . Most of this growth would come from countries not currently in the Organization for Economic Cooperation and Development (OECD), and it is focused in regions where strong economic growth is driving demand, particularly Asia. While these numbers have been slightly altered, the story remains unchanged. Energy demand will continue to grow but natural gas will be the only fossil fuel that will continue to grow through 2050, by 0.5% y/y, because of consumption in buildings and industry . The International Energy Agency (IEA) projects a similar situation, where total energy demand returns to its pre-crisis level by early 2023, though trends and timing vary between countries .
While renewables will mainly see an explosion in growth through 2030, analysts still project oil demand will recover from the 2020 slump by 2023 and grow through 2030 as seen in Figure 1. After 2030, oil plateaus before an eventual decline around mid-century . Even supermajor oil companies like Shell, Total, and Exxon predict that peak oil demand is still ahead of the world while their competitor, BP, is one of the only ones to suggest peak oil is history [5, 6]. Despite decreasing production and fluctuating consumption through the years, crude oil and petroleum products remain the largest contributors to energy consumption. This is precisely what worries analysts about necessary oil and gas development in the future.
Estimated Exploration Explosion
The ongoing COVID-19 pandemic has hit many industries hard, but the global oil and gas industry has taken one of the biggest hits. This situation has forced many oil and gas companies to either slow down or stop operations, impacting production in both upstream and downstream operations. This is where Rystad projects the world will run into problems down the road. Since oil and gas will remain key pillars in the global energy mix for the foreseeable future, companies need to continue to explore, drill, and produce crude to meet the growing energy demand of the future. To meet this cumulative demand over the next 30 years, some analysts predict “undeveloped and undiscovered resources totaling 313 billion barrels of oil need to be added to currently producing assets” . Rystad Energy calculates that to match this requirement, exploration programs will have to discover economic reserves totaling 139 billion new barrels of liquids by 2050, an impossible task if this decade’s low exploration activity levels persist . Granted, the target is high because not all existing discovered volumes are profitable to develop. According to their analysts theory, the total undeveloped supply would amount to 248 billion barrels of oil between 2021 and 2050 . The problem with the reserves found in the past decade and their current development status, about 74 billion barrels are highly unlikely to materialize and therefore need to be replaced by new discoveries . In order to achieve the volumes proposed, there are two main sources for global exploration potential: additional recovery of existing fields and new discoveries. Figure 2 shows Rystad’s assumptions to determine the total liquids supply required for 2050 demand.
Secondary Recovery and Technological Advancements
This first source of additional production involves discoveries in their early stages that have not yet been fully developed. Further exploration activity will eventually lead to reservoir delineation and enhancement of resource estimates, while technological improvements and other secondary recovery techniques will also increase recoverable volumes . Estimates show these projects have the potential to produce about 378 billion barrels of liquids supply between 2021 and 2050 . If future exploration efforts follow industry norms, secondary recovery and technological advancements should enhance recoverable resources by around 5%, or 18 billion barrels . These 18 billion barrels account for 13% of the projected 139 billion barrels that must be added to the world’s undeveloped supply which leaves approximately 121 billion barrels to be produced through future exploration drilling in currently undiscovered areas.
The second source of additional supply holds the most potential, but also includes the greatest risk. By analyzing discovery rates from 2010 to 2020, Rystad expects global conventional volumes need to be around 4 billion barrels per year, with an average discovery size of around 40 million barrels . This means that explorers would need to announce at least 100 new conventional discoveries each year to meet demand. As seen in the past, not all volumes discovered during this period will be developed and produced. Therefore, the total discovered volumes will have to be much higher than the required cumulative liquids supply of 121 billion barrels. To get an idea of how much higher, historical production data can be evaluated.
Historically speaking, about 617 billion barrels of liquids have been found since 1990, and about 25% of these discovered volumes had been produced through 2020 . Therefore, explorers need to discover about 484 billion barrels of new resources through 2050 in order to bring the required 121 billion barrels to production over the next 30 years. Unfortunately, global exploration success has dropped sharply from about 72% in 2010 to 17% in 2020 as “easier” hydrocarbons have already been discovered . As it becomes increasingly more difficult to find new resources in mature areas, analysts expect deepwater offshore areas to continue to dominate future new discovered volumes. Luckily, companies like Apache and Exxon are proving the potential of offshore discoveries with their recent success in offshore developments of Suriname and Guyana.
So how does this proposition for future oil and gas production fit into the energy transition? Interestingly enough, the Rystad case assumes we will continue down our current path in the energy transition. “Unless we see a momentous transition in the global energy mix sooner than currently expected, or a much faster development pace than the current norm,” they expect oil and gas development to rise through 2050 . To the naked eye, this assumption might seem foolish as we have seen the explosion and projections for clean, carbon-free energy to take off in the coming years. But Rystad recognized an opportunity during the global pandemic. The stark drop in energy demand due to the coronavirus pandemic will remove some 2.5 years’ worth of energy sector emissions between now and 2050, according to BloombergNEF’s latest New Energy Outlook 2020 . This opens the door for further oil and gas development as current practices allow for continued emission reductions without having to dramatically alter or halt operations. Since the crisis generated by COVID-19 will reduce emissions emitted in the energy sector with a 2.5-year equivalent volume, emissions now only need to be reduced by 6% every year to remain below a rise in global temperature of two degrees . While a 6% reduction seems like an intense feat, new emissions regulations on the national and state level within the United States alone make these targets well within reach for the oil and gas sector. As other countries continue to adopt stricter emissions requirements, it allows for oil and gas companies to continue to operate and provide the necessary energy the global economy needs.
The ongoing COVID-19 pandemic has hit industries hard, but perhaps the one industry which has taken the biggest hit is the global oil and gas industry. This situation has forced many oil and gas companies to either stop or slow down operations, which has impacted production both in upstream and downstream. Despite decreasing production and fluctuating consumption through the years, crude oil and petroleum products remain the largest contributors to energy consumption and will continue to be a vital part of the energy mix into the future. As a result, the scope of exploration will have to expand significantly. According to senior upstream analyst at Rystad Energy, Palzor Shenga, “unless we see a momentous transition in the global energy mix sooner than currently expected, or a much faster development pace than the current norm, upstream players may have to more than double their conventional exploration efforts in order to meet global oil demand through 2050” . While these statements seem bold, Rystad has backed them with the data. As they project the world will need 313 billion barrels of undeveloped and undiscovered resources between 2021 and 2050, only 248 billion will come from undeveloped but proved resources (as an estimated 74 billion are highly unlikely to materialize) which leaves an additional 121 billion barrels of oil that must be produced by 2050 to come from new exploration. The problem is, at current commodity prices, doubling their exploratory efforts is impossible. Exploration companies around the world have slashed their budgets due to limited capital, and a huge chunk of what has been sidelined are exploratory plans. While near term pain will certainly still exist, oil and gas will continue to be a vital pillar in the energy mix and fossil fuels will reign again. Those that make it through these trying times will be well positioned to be the companies that usher in a new age of necessary exploration.
Subscribe To News Pulse
Subscribe to receive the latest news and updates from our team.