In March 2017, the International Energy Agency (IEA) issued a market forecast that stated:
Global oil supply could struggle to keep pace with demand after 2020, risking a sharp increase in prices, unless new projects are approved soon . . . In the next few years, oil supply is growing in the United States, Canada, Brazil and elsewhere but this growth could stall by 2020 if the record two-year investment slump of 2015 and 2016 is not reversed.
Rystad Energy explored this more in December 2017. Sonia Mladá Passos, Senior Analyst at Rystad Energy, stated:
Global exploration expenditures have decreased year-over-year for three consecutive years now, falling by over 60% from 2014 to 2017.
I do believe IEA sees a small uptick in 2017 so there are probably different calculations going on between IEA and Rystad Energy.
Not only have exploration expenditures declined, but what's actually being found via newly discovered offshore fields are declining:
An average offshore discovery in 2017 held ~100 million barrels of oil equivalent, compared to 150 million boe in 2012. “Low resources per discovered field can influence its commerciality. Under our current base case price scenario, we estimate that over 1 billion boe discovered during 2017 might never be developed”, says Passos.
Oil Price's Nick Cunningham noted:
Because large conventional discoveries typically take years to develop, it is not as if the shortfall will be felt immediately. Even the past several years of paltry discoveries probably won’t lead to supply problems for quite a while.
To combine IEA, Oil Price and Rystad together: Oil exploration is probably holding steady, but a lot of oil discoveries will not get developed. Per Oil Price, discoveries take years to develop. So even if we're finding new oil fields, it may not do anything to avert a 2020 price jump.
As a side note, he mentioned a key fact from the IEA:
The IEA also noted that about 2.5 mb/d of supply is lost each year due to depletion, a gap that must be made up with new projects.
This is an important note as this depletion rate is a reason why OPEC doesn't believe that shale alone can offset the continued cuts that they extended into 2018.
It should be noted that upstream investments are slowly turning around. Both Barclays and Wood Mackenzie see improvements in investments. Barclays sees 2018 improving by 8%, but mentions:
Considering the past two recoveries showed materially higher growth in year 2 (+12% in 2004, +23% in 2011), operators remain cautious on oil prices and judicious with capital.
Wood Mackenzie sees growth improving "slightly" to $400 billion (note that other sources I looked through appear to indicate that 2017 is around $450 billion so this is probably another example of different experts using different calculations).
Barclays comment may be due to the fact that everyone is talking about peak demand (be it as soon as the 2020s or as late as the 2040s). Either way, maybe this is helping curb capital expenditure enthusiasm. Maybe everyone knows that OPEC is holding 1.8 mb/d off the market and who knows if they might change their strategy again, potentially killing oil prices in the near term. Also, we know that investors are wanting to see financial improvements and spending a lot on exploration without an immediate return on investment doesn't help matters.
One things I need to explore further is what is assumed to be an appropriate level of capital investment in upstream oil.
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