January 2022

The last barrel

Underinvestment—a good strategy?
Craig Fleming / World Oil

In 2021, global oil and gas discoveries hit their lowest level in 75 years. Total global discovered volumes in 2021 were calculated at 4.7 Bboe, the lowest tally since 1946. This also represents a considerable decline from the 12.5 Bboe added in 2020 (Rystad Energy). Liquids continue to dominate the hydrocarbon mix, accounting for 66% of discoveries. The monthly average of discovered reserves in 2021 was 424 MMboe. The reduction in volume accentuates the absence of large individual finds, as has been the case in previous years. However, several offshore discoveries are poised to gain momentum in 2022 despite underinvestment by many major industry players.

Mexico. The largest discovery in November 2021 was Lukoil’s Yoti West offshore Mexico, which is estimated at 75 MMboe of recoverable resources. Although the discovery strengthens Lukoil’s position in Mexico, the volumes are insufficient for commercial development. Additional discoveries of a comparable scale are required before development can proceed. However, this does provide hope to Mexico that the country can halt or slow down its production decline. Several wells are scheduled to be drilled in blocks offered in various bidding rounds, many by leading international oil companies.

Offshore Malaysia. The Nangka-1 became the second successive exploration well in Block SK 417. The wildcat was drilled by Thai state operator PTTEP to a depth of 3,758 m and discovered sweet gas in the Middle to Late Miocene Cycle VI clastic reservoirs. Norway also continues to unearth small-to-medium finds, providing an opportunity to materialize these discoveries with available infrastructure.

Colombia. The underinvestment trend has put Colombia in a compromised position. Latin America’s third-largest oil producer—after Brazil and Mexico—is in danger of losing its energy self-sufficiency and a significant part of its gross domestic product (12%), unless the pace of exploration accelerates. The country’s hydrocarbon output, along with its total proven reserves, is in decline, while investments will likely fail to recover to pre-Covid-19 pandemic levels this decade. Exploration expenditure offshore Colombia in 2021 was $145 million, significantly less than the $600 million in 2015 and $500 million in 2017, Nevertheless, a mild uptick is expected, and in 2023, exploration spending is forecast to reach $200 million for the first time in six years.

During 2021, crude production in Colombia hit its lowest level since 2009, averaging 730,000 bpd, down from 754,000 bpd in 2020, which was already an 11-year low. Amid a lack of discoveries, the country’s proven crude reserves at the end of 2020 stood at 1.82 Bbbl, a three-year low and significantly less than the 2.45 Bbbl recorded in 2013. “Columbia must double investment in the next decade to continue to be energy self-sufficient, says Rystad analyst Sofia Forestieri.

Russia is missing its OPEC targets and is projected to deliver just half of its scheduled increases in crude production over the next six months. With Brent trading at $88/bbl, the outlook for Russian output leaves the global market even tighter than expected. It risks amplifying the energy price surge that’s contributing to the highest inflation in decades. In the booming Asian market, Russian premium ESPO crude—a favorite grade among Chinese processors—has already surged to its highest price since November, amid declining inventories.

Russia’s production started stagnating in November, and in December, it dropped below its OPEC+ quota. The first days of January brought less than a 1% rise in the country’s total petroleum output, which includes crude and condensate. Russia pledged to add 100,000 bopd to the market each month, starting in January. But due to declining drilling in 2021, monthly increases are projected to average just 60,000 bopd during the first half of 2022.

OPEC is struggling too. The Organization of Petroleum Exporting Countries is attempting to restore output halted during the pandemic. The coalition pledged to add 400,000 bopd each month, yet actual production increases have fallen short, due mainly to internal unrest and insufficient long-term investment. Last month, OPEC increased output by just 90,000 bopd.

UAE Energy Minister Suhail Al-Mazrouei said OPEC is increasing production, but he warned the cartel could not solve the global oil supply issues alone. “The industry needs investment, through the involvement of international oil companies, to provide adequate supplies. Failure to infuse sufficient capital may lead to future price hikes,” Al-Mazrouei warned.

Inflationary pressure. If OPEC+ continues to fall short of production targets, there may be wider economic consequences. The recovery in oil demand has remained robust, as the Omicron Covid variant has had a milder effect on the global economy than anticipated. Brent has jumped 10% since the start of the year and may go higher, according to Vitol Group. Surging energy prices are a significant contributor to rising inflation, and the U.S. White House has consistently applied pressure on OPEC+ to boost supply and help curb costs, rather than call on U.S. producers to increase output.

Underinvestment—a boon for the industry. The reason oil prices are reaching multi-year highs is an unexpected supply gap caused by robust demand despite Omicron, outages and geopolitical unrest. A major contributor to the lack of surplus production capacity was caused by excessive pressure applied by short-sighted politicians caving into demands from environmental groups. This created an unprecedented reduction in investment in hydrocarbon-based energy, in favor of developing unreliable green resources. This is the result when dumb and dumber combine to dictate global energy policy.

About the Authors
Craig Fleming
World Oil
Craig Fleming Craig.Fleming@WorldOil.com
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