UBS | We have updated our Upstream major project database. Further cuts to capital investment, responding both tactically to this year’s very low prices but also, increasingly, strategically to a changing market outlook, have contributed to another year of below -trend project development activity. In combination with the crash stop in activity in 2015 and increasingly what looks like a below-trend 2017, it is suggestive of a significant emerging shortfall in new supply from 2018 onwards. 2015 saw 9 large FIDs corresponding to 1.3Mboe /d, while 2016 to date stands at 5 projects corresponding to 0.7Mboe/d. This compares with the 2010-14 average of 32 projects and 5.0Mboe/d.
The impact of crash-stop in investments is not immediate
Since conventional development cycle times are long, the impact of this dramatic slowdown in investment activity on production is not immediately apparent. 2016 and 2017 still look like healthy years, a legacy of investments earlier in the decade when oil prices were >$100/bbl, and the risk is that casual observation suggests little problem.
Hole in supply becomes evident 2018+
Our bottom-up analysis shows the impact of these low levels of development activity becomes increasingly evident from 2018 onward. Although shorter -cycle US production will likely offset some of this shortfall the risk is that there is not the productive capacity to do so completely. In addition, with OPEC spare capacity approaching historical lows the danger of a supply shortfall becomes greater.
Prices will need to move higher to incentivise new investments
In the longer term, oil prices need to move higher to incentivise sufficient new supply. We believe that this certainly means between $60 -$80/bbl and probably $70-$80/bbl. (UBSe $75/bbl LT). But with industry balance sheets stressed, competing demands on any future operating cash surplus, and reduced appetite to commit long-term development capital, even a recovery to these levels may not generate a sufficient initial investment response. So while the current market implies there is no problem with supply, it could be argued that the next crisis has already begun.