Taking action in support of our vital natural resource sector

Key Points

• The world runs the risk of massive oil and gas supply shortages if actions are not taken in the short term to increase investment and exploration

• Trillions of dollars of new investment are needed to prevent the destabilization of oil and gas markets

• Oil and gas supply shortages could wreak havoc on global economies and severely hinder the world from making a transition to renewable energy

It is no doubt that 2020 brought about drastic change for the oil and gas sector. Faced with a global pandemic, as much as 30 per cent of global oil demand disappeared almost overnight as countries implemented lockdowns and other protectionary measures to prevent the spread of COVID-19. Many governments were also forced to re-evaluate their strategic and economic calculus - especially those of some of the world's top economies - leading to strengthened commitments to shift towards renewable energy.

What does it all mean for the oil and gas industry? Several leading energy companies and research firms are saying that the pandemic-induced oil demand drop – the largest in history – has repercussions that will extend through a future supply shock if significant investments and exploration activities in the oil and gas sector do not continue.

BCG & IEF: Major New Investment Needed to Maintain Supply

A December 2020 analysis conducted by the International Energy Forum (IEF) in partnership with Boston Consulting Group (BCG) suggests that current capital expenditures in the global petroleum sector are insufficient to produce oil and gas volumes needed to maintain market stability.

According to BCG, another wave of boom-and-bust pricing created by a lack of oil and gas supply would only be detrimental to the prospects of an "…inclusive and sustainable economic recovery that producers, consumers, and governments all want."

Both the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC) have stated in their most recent reports that they don't expect oil demand to peak within the next decade. While they have disagreements on how fast demand will recover post-COVID-19, they both agree that the world needs another 27 to 30 million barrels of oil equivalent (mmboe) by 2022 to close the gap between production declines and demand levels. By 2030, both organizations expect those volumes to increase to anywhere from 68 to 70 mmboe.

Courtesy of BCG & IEF

Further analysis by the IEF suggests that investment into the oil and gas sector will have to rise by 25 per cent over the next three years to prevent a supply crisis. Those sums become considerably larger by 2030 to ensure sufficient supply and guarantee stability in the global market.

"The key issue in a post-COVID-19 market risk assessment should not be peak demand but peak investment," says the report, a position that was more or less echoed by Rystad, a major global energy research and business intelligence company headquartered in Norway.

Rystad: Billions of Barrels Needed to Meet Demand

According to Rystad, the world is on pace to run out of sufficient oil supplies to meet demand through 2050, despite the effects of the COVID-19 pandemic on global markets. Rystad warns that trillions of dollars of investment is needed into new exploration alone over the next 30 years to meet global cumulative demand.

As said in the report, "…undeveloped and undiscovered resources totalling 313 billion barrels of oil need to be added to currently producing assets" to stave off a supply crisis within 30 years. Rystad calculates that exploration activities will have to discover up to a whopping 139 billion new barrels of liquids by 2050, a task that's impossible if the low exploration activity levels seen so far this decade persist.

Further analysis by Rystad on current discovery rates and the latest trends in the oil and gas sector shows that to keep up with global demand, this equates to at least 100 new conventional discoveries each year through to 2050.

Rystad puts the sheer amount of new volume of oil and gas needed into perspective for us all:

"About 617 billion barrels of liquids have been found since 1990, and about 25% of these discovered volumes had been produced through 2020. Analogically, explorers would have to unearth about 484 billion barrels of new resource through 2050 to put the required 121 billion barrels of liquids to production over the next 30 years."

Courtesy of Rystad Energy

In other words, the world will need to find new volumes equivalent to more than 75 per cent of all petroleum liquids found over the past 30+ years by 2050 to prevent a supply crisis.

To add, the current global exploration success ratio for finding new and "producible" oil reserves has dropped sharply in recent years, from over 70 per cent in 2010 to 17 per cent in 2020 – another huge cause of concern when discussing a potential global oil supply shortage.

Unconventional exploration and production will also contribute to supplying about 30 per cent of the global deficit volumes between 2021 and 2050.

Rystad projects that 118,500 new oil and gas wells will be drilled worldwide through 2022 supported by vaccination efforts and OPEC+ supply cuts, indicative of a full demand recovery to come soon.

BP: Up to $20 Trillion of New Investment

Last year, British oil giant BP sent shockwaves through the global petroleum sector after suggesting the world had already passed 'peak' oil demand. In the company's 2020 Energy Outlook, Chief Executive Officer Bernard Looney pledged that his company would increase its spending on renewables by 20x, up to $5 billion per annum by 2030 and "… not enter any new countries for oil and gas exploration."

But perhaps what's confusing about his statement is that according to the 2020 Energy Outlook's "Business as Usual" scenario, anywhere from $9 trillion to more than $20 trillion of new investment will be needed in the global oil and gas industry to keep up with demand through to 2050.

BP typically models three "scenarios" in its annual outlook. In 2020, those were: Business as Usual (BAU), Rapid Transition (RT), and Net Zero (NZ). BP sees oil demand remaining just under 100 million barrels per day (bpd) through to 2030 in its BAU scenario before eventually tapering off down to 89 million in 2050.

Courtesy of BP Energy Outlook 2020

It's important to note that BP made these calculations before successful global vaccine rollouts in 2021 that have allowed major economies to start re-opening and the outlook for future fuel demand to improve drastically. According to Reuters, as of May 2021 oil demand is already back to about 95 per cent of its pre-pandemic highs.

In a more recent interview, Bernard confirms in more words less that BP won't be in any rush to leave the countries it is currently operating in, stating that "Hydrocarbons remain core to our strategy… without hydrocarbons, BP won't be able to transition. Oil and gas will be part of the energy mix for decades to come."

It looks like BP needs some major bucks to invest in renewables in order to make the energy transition, like everyone else does.

David Blackmon, an independent energy analyst/consultant in the U.S., has told Forbes that many analysts are skeptical about BP's other more rapidly transitioning RT and NZ scenarios. Their consensus is that BAU is the most realistic of the three, given the complete chaos that global oil and gas shortages would cause and sheer levels of investment into renewables that would have to occur in order for the other two to materialize.

Even BP – one of the most dedicated major global oil companies to making the transition to renewables – suggests that trillions of dollars of new investment will be needed through to 2050 to prevent an oil and gas supply shortage. We should all be wary of such warnings before such shortages hinder us from making an "…inclusive and sustainable economic recovery that producers, consumers, and governments all want," as suggested by BCG, wouldn't you agree?

IEA: Up to $17 Trillion in New Investment

The IEA's own figures on projected new investment required to prevent an oil and gas supply shortage are in relative agreement with BP's BAU scenario. According to the IEA's World Energy Outlook 2020, between $12 to $17 trillion of additional investments is needed by 2040 to stave off a global supply crisis.

These findings are in stark contrast to a new May 2021 report by the IEA that says to reach net-zero emissions by 2050, no new investments are needed in fossil fuels. According to OPEC, the IEA's statement could increase oil market volatility and lead to massive supply shortages in the future.

"The claim that no new oil and gas investments are needed post-2021 stands in stark contrast with conclusions often expressed in other IEA reports and could be the source of potential instability in oil markets if followed by some investors," said OPEC, as per sourced by S&P Global Platts.

According to the IEA, oil supplies would need to shrink by more than 8 per cent annually to reach this goal. By 2050, oil demand shrinks to 24 million bpd, a wildly different projection when compared to BP's most likely BAU scenario which puts that figure at 89 million bpd.

Is oil demand really going to drop by 8 per cent per annum for the next 30 years? S&P Global Platts estimates the pandemic has permanently "... reduced long-term world oil demand by 2.5 million barrels per day," but that peak oil is still not here yet and will happen sometime in the 2030s.

But let's remind ourselves that we shouldn't be so concerned about global oil demand, which has always returned to strength and growth after periods of recession in the past. As BCG and the IEF put so eloquently, the focus should be on preventing a severe supply shortage induced by a lack of investment in today's global oil and gas markets that could "…lead to greater market volatility and higher prices, slowing the global economic recovery and jeopardizing energy security, and international goals."

Canada Should Be a Global Supplier of Choice

It's clear that a future oil supply crisis would be disastrous for nations worldwide and would hinder many in their transition to a lower-carbon future. Another report by BCG found that the COVID-19 pandemic has already made it more challenging for undeveloped nations to shift towards renewables, and a future oil supply shortage would only exacerbate the situation.

Canada - the world's fourth-largest producer and exporter of oil - is well-positioned to step up to the plate and help prevent any looming oil and gas supply crisis. Of the world's top 15 reserve holders, Canada ranks first in Environmental, Social, and Governance (ESG) performance, and of the world's top 20 producers, second in social and governance, and fourth in the environment.

It only makes sense that as long as the world needs oil and gas – and it will for decades to come – that it comes from responsible producers like Canada. As one of the few global producers with carbon pricing and a world-class regulatory regime, Canada should be a global supplier of choice now, and in the decades to follow.

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