Although President Donald Trump signed an executive order on April 28 seeking to expand offshore oil and gas drilling in the United States, it isn’t likely to have much of an impact. Low oil prices and cheap shale oil have reduced spending on conventional oil projects to the lowest level in more than 70 years.
In fact, while there are concerns on the part of environmentalists that the president’s order could lead to reversed drilling bans on much of the US continental shelf including the Pacific, the Atlantic and the Arctic Oceans and the Gulf of Mexico, it probably won’t, according to a new study by the International Energy Agency, released on April 27.
Critics said the move defies market reality, with crude prices too low to justify drilling in what David Jenkins, president of Conservatives for Responsible Stewardship, a non-profit conservation group, called “the riskiest and most expensive places on the planet when the current oil glut will make such ventures unprofitable for the foreseeable future.”
In 2016, only 13 percent of all conventional resources approved were offshore, compared with more than 40 percent on average between 2000 and 2015, according to the IEA. In the North Sea, for instance, oil investment fell to less than US$25 billion in 2016, about half the level of 2014.
The trend towards reduced spending and exploration is expected to continue for at least the rest of this decade, according to the report. The US now derives 19 percent of its energy needs from renewables, with the percentage growing annually as solar and wind power get cheaper. The Nordic nations and Germany are far ahead of the US. The production of wind power in the North Sea is now approaching the level of spending on oil.
The low prices have had a profound effect, for instance, on Malaysia, where the ringgit has been crippled as prices have refused to budge. By one estimate, oil revenues dropped by RM40 billion and contributed to a fall in the ringgit to its current level of RM4.34 to the US dollar. In Saudi Arabia, oil revenues dropped by 50 percent between 2014 and 2016 and could potentially threaten the stability of the population, where 30 percent of 16-24-year-olds are out of work.
“Oil discoveries declined to 2.4 billion barrels in 2016, compared with an average of 9 billion barrels per year over the past 15 years,” according to the IEA report. “Meanwhile, the volume of conventional resources sanctioned for development last year fell to 4.7 billion barrels, 30 percent lower than the previous year as the number of projects that received a final investment decision dropped to the lowest level since the 1940s.
The sharp slowdown in activity in the conventional oil sector was the result of reduced investment spending driven by low oil prices, the report said, bringing an additional cause of concern for global energy security at a time of heightened geopolitical risks in some major producer countries, such as Venezuela.
“The slump in the conventional oil sector contrasts with the resilience of the US shale industry. There, investment rebounded sharply and output rose, on the back of production costs being reduced by 50 percent since 2014. This growth in US shale production has become a fundamental factor in balancing low activity in the conventional oil industry.”
Conventional oil production of 69 million barrels per day represents by far the largest share of global oil output of 85 mb/d, the report continued. In addition, 6.5 mb/d come from liquids production from the US shale plays, and the rest is made up of other natural gas liquids and unconventional oil sources such as oil sands and heavy oil.
With global demand expected to grow by 1.2 mb/d a year in the next five years, the IEA has repeatedly warned that an extended period of sharply lower oil investment could lead to a tightening in supplies. Exploration spending is expected to fall again in 2017 for the third year in a row to less than half 2014 levels, resulting in another year of low discoveries. The level of new sanctioned projects so far in 2017 remains depressed.
“Every new piece of evidence points to a two-speed oil market, with new activity at a historic low on the conventional side contrasted by remarkable growth in US shale production,” said DrFatihBirol, the IEA’s executive director. “The key question for the future of the oil market is for how long can a surge in US shale supplies make up for the slow pace of growth elsewhere in the oil sector.”
The US shale industry has lowered its costs to such an extent that in many cases it is now more competitive than conventional projects, the report continued. The average break-even price in the Permian basin in Texas, for example, is now at US$40-45/bbl. Liquids production from US shale plays is expected to expand by 2.3 mb/d by 2022 at current prices, and expand even more if prices rise further.