The last barrel

Given the seemingly relentless onslaught being inflicted upon the nation’s oil and gas industry of late, it’s refreshing to hear someone in the political realm making constructive suggestions, as regards the long-term health of the industry.

As we are all too painfully aware, depressed prices have driven investment down and, although at present, it may be difficult to get our heads around—given continued overproduction and highly elevated storage levels—the industry could be setting itself up for a future supply shortfall.

According to a new report by the good folks at Wood Mackenzie, the global oil market could face a multi-million-barrel supply shortfall within 20 years, if recent exploration success, or rather a lack thereof, doesn’t improve.

“Over 7,000 conventional fields have been discovered in the last 15 years and, although these developments will play a critical role in securing future oil supply in the medium term, modeling a continuation of poor exploration results shows that the market could see a 4.5-MMbpd shortfall by 2035,” said Patrick Gibson, director of global oil supply research at Wood Mackenzie.

Unfortunately (or perhaps fortunately—I guess it depends on your perspective), a wave of elephantine discoveries appears to be somewhat unlikely. According to the Edinburgh-based consultancy, the price collapse resulted in exploration budgets being slashed, and this year the company expects industry to invest half of the level seen in previous years.

The report came just after U.S. Sen. Lisa Murkowski (R – Alaska), chairman of the Senate Committee on Energy and Natural Resources, held a hearing on oil and gas in a low-price environment. One of the more salient takeaway points was the importance of long-term, strategic thinking.

“While some are panicked at the notion that we are sitting at low oil prices—and have been for some period of time—and are suggesting that we should not be looking to make longer-term investment, I’m looking at it and taking the exact opposite view,” she said.

Speaking at the hearing, Murkowski said that the prevailing oil and gas price environment presents an opportunity to pursue federal reforms that will both boost production and provide economic benefits.

“As oil and gas production is heavily capital-intensive, it takes a long time for these projects to come online,” Murkowski said, adding, as an example, that development in the non-wilderness part of Alaska’s ANWR would take eight to 12 years after legislation was enacted to open up the 1002 area for exploration and production.

Given the fact that the Obama administration seems intent on ramming as much anti-industry regulation and ideology—think offshore emissions, the final well control rule, pending methane regulations and cancelled Atlantic lease sales—as possible down the industry’s collective throat, Murkowski’s comments represent a breath of fresh air, especially in light of potential future supply shortfalls.

A statement accompanying Murkowski’s comments warned that current policy often serves as a disincentive to domestic production, thereby rendering resources produced in foreign nations more attractive.

So, given the aforementioned lack of recent exploration success, decreased investment and a hostile regulatory environment, one has to wonder why our nation’s leaders appear so intent on forcing the nation to be overly reliant on non-domestic production—especially in the aftermath of last month’s display in Doha, where 16 nations flocked to the Qatari capital for ill-fated discussions on freezing production.

Given the fact that other nations are clearly putting their own interests first, it begs the question why the present U.S. administration seems so intent on putting the nation’s future energy security in the hands of foreign powers, who, ultimately, do not have the country’s best interests at heart.

It would seem that what we need is a consistent, stable system that will enable the domestic industry to function as efficiently as possible, and therefore compete as effectively as possible, in the wider market.

But what, you might ask, should these reforms look like. Well, thankfully, Murkowsi had some good suggestions on where the U.S. could start.

“We need to provide new access, we need to establish reasonable systems for leasing and development, and we need to reform what is often an overly cumbersome permitting process,” the senator said. “Right now, we do not have that system at the federal level, but with policy improvements, we can get there.” And as Murkowski correctly pointed out, the time for such reforms is now—not during the next boom.

The danger of on an over-reliance on non-U.S. production also was highlighted by Jason E. Bordoff, founding director of the Center on Global Energy Policy at Columbia University. In his testimony, Bordoff warned that “geopolitical and economic risk to oil supply” abound.

“If a significant supply disruption were to occur, there is also less of a cushion in the global oil market to handle it, with OPEC spare capacity—oil that can be quickly brought onto the market to compensate for production losses elsewhere—at historic lows,” Bordoff said.

And the question of how effectively U.S. producers, or shale producers in particular, can assume the unwanted mantle of swing producer in the face of future supply shortfalls remains to be answered.

“In truth, we do not know how quickly U.S. production can start rising again, or at what oil price that happens,” Bordoff said. “Shale oil is a new phenomenon. Yet, we know it will not happen overnight. It takes time for capital markets to open up, for companies to get the rigs and equipment, and for laid-off workers to return. Even if prices rise back to $55 or $60/bbl, around the level at which many expect U.S. supply could begin rising again, it may take nine to 12 months for domestic production to follow that market signal.”