Oil: Future Supply Shock?

Wood Mackenzie, a research and consulting group, recently issued a report about the lack of major oil discoveries. This lack of major oil discoveries is directly correlated to a lack of investment. The study is based on a revised forecast by the group, looking out to 2040.

Their big concern is that exploration spending has dropped from $60 billion in 2014 to $25 billion in 2018. The result is that discoveries of oil has dropped from 8 bn bbls p.a. in the early 2010s to just 2 bn bbls p.a. since 2014. (My assumption is that bn bbls p.a. means billion barrels per annum).



Their key comment is the following:

A supply gap opens up in the mid-2020s, reaching 3 million b/d by 2030, 9 million b/d by 2035 and a formidable 15 million b/d by 2040.

The above quote might be based on a baseline assumption of 2 bn bbls p.a. being discovered. I say that, because Oilprice states: Even if the industry were to somehow return to the good ol’ days prior to the 2014 market crash, and begin discovering around 8 billion barrels of oil each year, it would only delay the supply crunch into the 2030s, according to WoodMac.

To avoid this crunch, the group argues that more needs to be spent on exploration now. They argue there is plenty of free cash flow out there, $160 bn p.a. They argue that the money is instead being returned to investors.

I think there is another reason why money isn't being spent on exploration. As University of Cambridge wrote:

However, major carbon exporters with relatively high production costs, such as Canada, the United States and Russia, would see domestic fossil fuel industries collapse.

I think oil corporations aren't stupid. They read that we're heading towards peak demand (current consensus appears to be around 2035). They also should know that if they spend too much money on exploration, they might not be able to get a return on that capital.

As Wall Street Journal reported, BP is going to start oil production in the Gulf of Mexico in 2021. The project green light was in 2016! Wood Mackinzie also points out:

The oil market could be running short of oil capacity by the late-2020s at the current, low discovery rate. That’s worryingly near at hand given it takes the best part of 10 years for the average new discovery to build to peak production even with a marked improvement in project execution post-downturn. 

So what ever is invested to start oil production currently, won't hit peak demand until at least 2028. If we're hitting peak demand in 2035, that doesn't seem to allow much time to get a return on investment. One has to wonder if it isn't better for oil corporations to start shifting their free cash flow into other energy areas versus spending more on oil exploration. If oil prices spike, they get even more free cash flow to continue their diversification and their future survival.