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The U.S. shale resurgence has been one of the main themes in oil markets this year. while OPEC’s production cut deal to deplete the oil overhang and boost oil prices has been the other key development in 2017.
U.S. shale production is expected to grow over the next few years as the companies that survived the worst of the downturn showed resilience in the face of the lower-for-longer oil prices. But three years of low oil prices also led to the global oil industry slashing investments in conventional oil exploration. and deferring or revisiting development plans.
This has led to the lowest ever volumes of oil discoveries in 2017. Rystad Energy said last week. While the low level of discoveries is not an immediate threat to global oil supply. it could become such ten years down the road. according to Rystad Energy.
In ten years’ time. U.S. shale production may have peaked. at least according to OPEC that sees shale peaking after 2025. although the cartel has conceded that U.S. tight oil has defied previous forecasts and has increased production more than initially expected and will continue to do so in the short term.
This year has seen less than 7 billion barrels of oil equivalent discovered globally. a volume as low as last seen in the 1940s. Rystad Energy has estimated. What worries analysts the most is the fact that this year the reserve replacement ratio—the amount of discovered resources relative to the amount of production—was a mere 11 percent. compared to 50 percent in 2012. Sonia Mladá Passos. Senior Analyst at Rystad Energy. said.
Another point of concern is that the resources discovered per field also dropped. and this could affect the commercial viability of new discoveries.
“Under our current base case price scenario. we estimate that over 1 billion boe discovered during 2017 might never be developed“. Passos noted.
While everyone expects U.S. shale to continue to be a growth story over the next few years. questions arise as to how long and how much tight oil could offset the record lows in conventional discoveries.
In April this year. the executive director of the International Energy Agency (IAE). Fatih Birol. said. commenting on the previous record-low discoveries in 2016: “The key question for the future of the oil market is for how long can a surge in US shale supplies make up for the slow pace of growth elsewhere in the oil sector.“
According to Adam Waterous. CEO at Calgary-based Waterous Energy Fund. shale will not be able to fill in the supply gap. On the other hand. oil prices have to reach $80 a barrel and stay at that level for two years to give companies reasons to develop higher-breakeven deepwater projects offshore West Africa or Brazil. Waterous told Bloomberg.
Still. upstream companies are now in better shape to operate in the low oil prices. consultancy Wood Mackenzie said in its 2018 Upstream Outlook earlier this month.
“We also expect to see signs that the investment cycle is starting to turn and the sector has reset itself to operate at lower commodity prices.“
Tom Ellacott. Senior Vice President. said.
According to Angus Rodger. Upstream Research Director:
“The downturn meant that close to US$1 trillion was taken out of company spending from 2015 to 2020. But we believe the big cuts are over. Wood Mackenzie expects global capital expenditure to grow slightly in 2018 to a total of US$400 billion.“
WoodMac expects 2018 to be a third consecutive year of increase in the number of project sanctions from the 2015 low. The consultancy forecasts the number of major project sanctions to increase from just over 20 this year to 25 in 2018. “as operators take advantage of what may represent their best chance to lock in rock-bottom costs.“
While U.S. shale may not be enough to meet global oil demand growth in the medium and long term. in the short term the pace of tight oil production growth will influence oil prices. which in turn will impact the conventional exploration budget decisions of global oil firms.
