Written By: Mike Ross – Corporate Finance
The number of new oil and gas discoveries made over the last few years has declined. And fears of oil shortages are regularly returning—reminiscent of previous alarms about the planet’s shrinking black-gold reserves. On several occasions, the International Energy Agency (IEA) also issued alerts about slowdowns in investment. Even if the IEA increases its estimates for the 2016 global oil demand growth (mainly due to Europe’s higher consumption in the fourth quarter because of cold weather), the agency remains cautious about the outlook for 2017, forecasting demand will grow by 1.4 million barrels per day this year.
On the supply side, oil producers have committed to reducing production increases and could settle at 1.5 million barrels per day if they stick to their commitments. However, the United States is expected to increase its production in the range of 300,000 to 500,000 barrels per day in 2017. With oil in a state of overproduction since 2014, a difficult situation would arise if global supply fell back into a shortage.
Oil discoveries around the world collapse.
The volumes of conventional hydrocarbons discovered in 2016—11.6 billion barrels of oil equivalent—decreased by 25 percent compared to the previous year, despite two big discoveries made in Alaska, onshore and offshore.
According to IHS Markit, the research group, discoveries of new oil and gas fields have dropped to a fresh 60-year low, as companies put the brakes on research. There were only 174 oil and gas discoveries worldwide last year, compared with an average of 400 to 500 per year up until 2013. The number of 2016 discoveries fell by about 40 percent, calculated IFP Energies in its annual report.
But these estimates are, however, excluding gas and shale oil, particularly in the United States.
Last year, it was in this area that the biggest discovery was made—Apache Corporation’s Alpine High in Texas, with 15 billion barrels including three petroleum. A series of announcements in the region led the US Geological Survey in November to re-evaluate its reserves estimates in the Wolfcamp formation—part of the Permian Basin in Texas—to 20 billion barrels of oil.
Reserves are still there.
In its “Statistical Review of World Energy 2016”, British Petroleum (BP) referred to the proved global oil reserves being 1,697.6 billion barrels. And if BP mentioned a fall in 2015 of 2.4 billion barrels (-0.1 percent), it also stated that “reserves have nonetheless increased by 24 percent, or 320 billion barrels, over the past decade; and are sufficient to meet 50.7 years of global production”.
As Denis Florin, partner at Lavoisier Conseil explains, “There are many well-identified reservoirs whose development has been delayed in the last two years when companies have reduced their investments…. In addition, the reserves of unconventional oil are much faster to develop, and will also play the role of buffer in case of need.” Especially since in this area, significant resources have been identified recently.
Immediate cash flows better than exploiting reserves.
Similarly, the oil majors are no longer judged on the level of their reserves. “Today, investors are more attentive to the generation of cash flow,” admits Florent Maisonneuve, a managing director of AlixPartners. “Given the abundance of available resources, markets are assessing their ability to buy back at an acceptable cost.” While they have maintained high reserve renewal rates in 2016 (136 percent for Total, 109 percent for British Petroleum, 208 percent for Shell), this is much more thanks to acquisitions and new contracts than to discoveries. Total has committed several billion to agreements in Qatar, Iran, Brazil and Uganda. British Petroleum obtained a share of a giant concession in the United Arab Emirates. Royal Dutch Shell bought BG (British Gas Plc). And Exxon Mobil has just paid $6.6 billion to double its assets in the Permian Basin in Texas and in New Mexico, a deal that will increase its reserves of 3.4 billion barrels of oil equivalent.
In conclusion, according to the March 2017 report on oil from the International Energy Agency, if supply appears to be more important than demand today, oil demand is still expected to grow strongly until 2022, pushed especially by developing economies’ consumption. And even if reserves are not out of stock, the lack of investment in recent years to explore and exploit reserves could put pressure on prices again in the future. But this situation would not be due to lack of resources.