Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found here.
Oil and gas companies need to increase annual investment by 20 per cent or face a global supply crunch from 2025, a leading consultancy has warned.
An analysis by Wood Mackenzie found that the current industry recovery has been more gradual than in previous cycles, with a dearth of funds being pumped into new production. This could lead to a supply gap from the middle of next decade, pushing prices upward.
It could also put increased pressure on companies’ growth targets, triggering increased merger and acquisition activity in the coming years. “The recovery in investment has been slower and shallower than other upturns,” said Malcolm Dickson, head of European upstream research at Wood Mackenzie.
“We need to see investment to meet demand for oil and gas, which we see being robust in the long term, and to meet company growth targets.” The warning comes as the industry cautiously emerges from a downturn that saw the price of crude collapse by 75 per cent between mid-2014 and early 2016, to below $30 a barrel at its lowest point. While prices have now seen a resurgence, reaching more than $80 a barrel in recent weeks, producers remain wary of investing capital into new projects.
Development spending rose 2 per cent in 2017 and is expected to rise 5 per cent this year. Wood Mackenzie predicts this will increase from a low of $460bn in 2016 to around $500bn in the early-2020s — well below the peak of $750bn in 2014. But it would need to hit annual levels of around $600bn to meet demand for oil and gas over the coming decade, according to the consultancy.
Investment is likely to remain low in the short term, however, with companies taking a conservative approach to new projects, preferring smaller scale investments with quicker returns to larger, more expensive ones. They are also under pressure to return money to shareholders through dividends and share buybacks. “Shareholders are looking to benefit from sustained improvement in company cash return. They don’t wish to see companies substantially increase investment budgets at this stage in the cycle,” said Norman Valentine, an analyst at Wood Mackenzie.
Shale oil in the US is likely to be a key bright spot for investment in the coming years, with investment reaching 20 per cent above 2014 levels by 2023, according to Wood Mackenzie’s base case scenario. Liquefied natural gas is also likely to see increased activity, as it enters a new cycle. Investment in other areas is likely to be more muted, however.
The analysis also found that successful exploration would be important to restock inventories, but exploration budgets were slashed by 60 per cent during the downturn and have yet to recover.
