The pandemic and the mad dash towards sustainability sources has diverted dollars away from the global oil and gas sector. Wary oil companies have also resisted the temptation to splurge despite a stellar first quarter of 2021 for the industry, with few embarking on growth projects amid uncertain demand trends. A new report by the International Energy Agency this week to cut back on new spending on oil and natural gas will likely force companies to shelve plans for new production.
Rystad Energy, an Oslo-based energy research firm, estimates that global upstream spending — focused on oil extraction and exploration — declined by US$140 billion last year compared to 2019, and could see another US$140 billion hit this year, compared to pre-COVID-19 estimates. In short, the pandemic has wiped out 27 per cent of all planned investments.
Global upstream spending stood at US$382 billion in 2020 and is forecast to marginally grow to $390 billion this year. The research firm expects the effect of the pandemic to be a lasting one on spending as it will not return to pre-pandemic levels of US$530 billion any time soon. Growth will remain muted and investments will only inch up annually, rising to just over US$480 billion by 2025.
Canada is not spared from the downturn. While some of the country’s largest companies reported combined net profits of $3 billion in the first quarter, they have focused on capital discipline and paying down debt.
Financial Post spoke to Thomas Liles, vice-president at Rystad, about the Canadian oilpatch’s investment outlook over the next few years.
Q: Which jurisdictions will lead growth in investment in upstream spending?
A: The U.S., Russia, and China will be the jurisdictions with the top spending levels in 2021 with US$88 billion, US$41 billion, and US$38 billion in upstream investment, respectively.
In terms of spending growth, Saudi Arabia, Brazil, and Angola will post the biggest absolute gains in 2021, with increases of US$3.5 billion, US$2.8 billion, and US$1.9 billion, respectively, compared to 2020.
Further out, the U.S., Brazil, and Russia are likely to drive growth in absolute terms. Upstream investment by 2025 for these three jurisdictions is projected to increase by US$16 billion, US$9.6 billion, and US$9 billion, respectively, compared to 2020 investment levels. Canada comes in fourth place here, with a 2025 investment increase of US$8.1 billion compared to 2020 (or $24.2 billion in total).
Q: What’s the outlook for Canadian upstream spending and how does it compare with previous years?
A: Canadian upstream spending is projected to come in sixth place (globally) in 2021 at US$16.8 billion, representing a 4.5 per cent increase over 2020 levels. The industry is clearly in recovery mode, although we should remember that 2020 upstream investment collapsed to the lowest level in nearly two decades in nominal terms, so 2021 investment levels are still relatively low when comparing, for example, to our pre-COVID 2020 spending forecast of approximately US$25 billion.
Q: Where do you see most of the spending in Canada — oilsands, light oil, natural gas?
A: For 2021, we estimate the following investment split: oilsands (33 per cent), offshore (5 per cent), conventional onshore (20 per cent), shale gas (28 per cent), shale oil/tight liquids (14 per cent).
The year-over-year spending uptick for 2021 will be somewhat muted. Some of the larger oilsands operators have kept sustaining capex levels relatively low for the year as they focus on capital discipline and balance sheet health. Many short-cycle light oil players have likewise guided slightly more conservative year-over-year investment growth that will be backloaded into the second half of 2021.
From 2022, however, we expect year-over-year investment growth to exceed 10 per cent as oilsands players increase capex to levels required to sustain base production. Similarly, shale oil and gas players will help drive growth post-2021 given the relatively favourable outlook for AECO gas prices, Western Canadian condensate demand, and an overall more robust oil demand environment.
Q: Do you think investment is matching future global oil demand? Do you expect a supply crunch in the near future?
A: Yes, we believe that despite the reduction in upstream investments, supply will be able to meet demand for oil. One of the key reasons is that the medium and long term outlook for demand has also been affected by COVID-19 and the ongoing energy transition. Over the last year, we at Rystad Energy have lowered our peak demand for liquids from 105 to 102 million bbl/d and we are also forecasting a sharper decline in demand post peak.
Q: A recent report by the International Energy Agency report noted that the supply glut is over — are we going to be in a situation of sky-high prices? What is your forecast for oil prices?
A: We don’t expect to see sky-high prices over an extended time period. In fact we see greater chances of downwards pressure on oil prices over the next few years. Slower demand growth is one reason, but also the fact that OPEC+ countries still are holding back around 4 million barrels per day from the market whilst activity and production from U.S. are simultaneously recovering.
Q: Among non-OPEC producers, which jurisdictions will emerge as the most stable and important for the growth of future supply?
A: Norway, the U.S., and Canada will lead supply growth among non-OPEC producers with relatively high stability scores (based on Transparency International’s Corruption Perceptions Index Rating). By 2025, Norway is projected to add 900,000 bpd, the U.S. 700,000 bpd, and Canada 300,000 bpd compared to 2019 production levels.
Within OPEC we expect Saudi Arabia and Iraq oil production to grow in the medium term. By 2025 we predict that both countries will grow around 1 million bpd compared to 2019 production levels.
Read it from financialpost – Photo as posted on financialpost (An aerial view of oilsands near Fort McMurray, Alberta. While some of Canada’s largest companies reported combined net profits of $3 billion in the first quarter, they have focused on capital discipline and paying down debt. PHOTO BY RYAN JACKSON/EDMONTON JOURNAL FILES)
