A recent detailed research report from natural resources consulting firm Wood Mackenzie looked at the question of if there is enough upstream oil and gas investment.
The discussion centers on the oil and gas sector's current state and its ability to meet projected consumption demands. It begins by highlighting the industry's current upcycle due to rebounding energy demand following the Covid-19 pandemic and emphasizes that oil will continue to drive the global economy and energy security for the foreseeable future.
Investment levels in the oil and gas sector
Despite concerns about underinvestment in the sector, the report argues that current investment levels of approximately $500 billion per year are sufficient to meet demand through its peak and beyond. It points to three main factors supporting this claim.
First, there has been significant development of giant low-cost oil resources. Second, the industry has shown relentless capital discipline, making spending more efficient. Third, there has been a transformational improvement in investment efficiency, reducing costs and optimizing asset development.
Peak oil demand
Wood Mackenzie predicts that peak oil demand is likely a decade away. Despite efforts to transition to a less carbon-intensive economy, oil demand will continue to rise for several years, with growth gradually slowing after 2024. The article expects demand to peak at 108 million barrels per day in the early 2030s before beginning a long-term decline.
However, this demand reduction would require significant investments in electric vehicles, charging infrastructure, low-carbon power supply and battery raw materials – but this is happening. Wood Mackenzie predicts oil demand is likely going to remain above 90 million barrels per day out to 2050.
Challenges in achieving a low-carbon economy
While the report acknowledges the potential for an accelerated energy transition scenario, aiming for a 1.5C pathway, it emphasizes that such a steep decline in demand would require a considerable and unlikely boost in investments in low-carbon technologies.
The report further argues that the industry has matched oil supply with rising demand over the last decade, thanks to tapping into new supply sources, including the Middle East and the U.S. Additionally, the cost of new supply has dramatically fallen due to increased investment efficiency.
Investment efficiency and future demand
The analysis indicates the current investment rate of around $500 billion a year can deliver enough oil and gas supply to meet demand for the next decade, including the projected peak oil demand in the early 2030s. However, beyond this point, substantial investment will still be required to offset the natural declines seen in oil and gas fields without capital expenditure and meet demand from higher-cost sources.
Will there be a future supply shock?
There is an ongoing debate in the energy industry and among investors on whether there is systemic underinvestment in upstream right now. The industry's focus has traditionally been to deliver the supply required to meet demand, but the prospect of peak demand within a decade has changed the risk equation.
Without sufficient investment, oil supply from existing assets could decline much faster than the energy transition scenario's credible targets. While Wood Mackenzie acknowledges the uncertainties surrounding future spending profiles, it concludes that the industry risks overinvesting in the near term if budget increases exceed wider inflation.
Investment implications
The bottom line is that upstream capital expenditure is very unlikely to reach the $914 billion 2014 peak (in 2023 terms) again because more is being done with less. This means the oil and gas industry can meet projected demand at lower levels of capital expenditure and these lower levels of investment will unlikely lead to a supply shortage and, therefore, a price rally.
At first glance, stable but lower levels of oil and gas capital expenditure would seem to be bad for the oilfield services industry. However, the 90 million barrels of oil per day demand in 2050 means demand for oilfield services will still be significant. Moreover, that production will increasingly need to be decarbonized, and this is where both SLB (SLB, Financial) and Halliburton Co. (HAL, Financial) are well-positioned to derive quickly growing revenues from the carbon capture utilization and storage business.
Carbon capture utilization and storage
SLB, formerly known as Schlumberger, has a long history of working with oil and gas companies, and it has developed a deep understanding of the subsurface. This expertise is essential for carbon capture utilization and storage as it requires the safe and secure storage of carbon dioxide underground, in depleted oil and gas fields. The company also has a strong track record of innovation, and it is constantly developing new technologies to improve the efficiency and cost-effectiveness of carbon capture utilization and storage.
Halliburton is obviously a major player in the oil and gas industry and already has a strong track record of providing services to carbon capture utilization and storage projects too. However, its expertise in subsurface technologies is probably not as deep as SLB's. Additionally, I do not believe Halliburton has been as active in developing new carbon capture utilization and storage technologies as SLB.
Overall, SLB is likely to be better placed to derive revenue from the carbon capture utilization and storage business in the long term and means the stock should be one of the most resilient to the energy transition over the next two to three decades.
