Tepid upstream spending recovery in 2022 fuels future supply crunch fears

Global upstream spending recovered strongly in 2022 but remained below pre-pandemic levels, according to S&P Global Commodity Insights analysis, with producers' ongoing commitment to capital discipline despite high oil and gas prices stoking concerns of a future oil supply crunch.

Investment in major non-OPEC upstream projects excluding Russia totaled $451 billion in 2022, according to S&P Global data, a 19% recovery from $381 million in 2021 and 29% higher than the pandemic-induced spending slump of 2020.

But the total remains under the $475 million average in the three years to 2010 and well below the $690 million average during the oil price boom years of 2010-2014, the data shows.

Last year's muted spending recovery also comes despite sharply higher oil prices, which have traditionally been closely correlated to higher upstream investment. Dated Brent averaged $101.31/b in 2022, slightly higher than in 2014 when major non-OPEC project spending surged to a record $764 billion.

Fast-rising industry costs have diluted the impact of higher crude prices on upstream spending, in addition to producer caution over loosening purse strings in the wake of the COVID pandemic.

Growing policy action to curb the use of fossil fuels has also accelerated the expected peak and decline of oil and gas, and fueled fears that the world will face an oil supply crunch in the coming decade before enough renewable energy sources are available.

Under-investment theme

Analysis by S&P Global Commodity Insights lends weight to the view that spending has not kept pace with prices as in previous cycles.

Last year, 14 major non-OPEC oil projects were sanctioned, down from 16 in 2021. Although still in line with recent pre-pandemic levels and well above recent lows of just seven seen in 2016 and 2020, some are concerned that the industry faces a major supply shortfall in coming years.

"One big theme for 2023 is the underinvestment theme," Mike Muller, the head of oil trader Vitol's Asian unit, told an industry event on Jan 11. "[It's about] the big hole that COVID made in investor confidence in the profitability of the oil major states and what that meant for the upstream."

Muller's comment echoed recent warnings from the International Energy Agency, which in October noted that previous non-OPEC supply growth from higher prices spurring investment may be tough to repeat.

US shale producers in particular are struggling with supply chain constraints, cost inflation and capital discipline, the IEA said noting that: "This casts doubt on suggestions that higher prices will necessarily balance the market through additional supply."

According to OPEC, the global oil industry needs to add 5 million b/d of new production capacity each year to offset natural declines, with a total of $12.1 trillion in spending needed through 2045.

New projects

S&P Global expects a steady slate of new oil projects to support conventional non-OPEC production growth over the coming decade. A total of 102 major new oil projects tracked by analysts at S&P Global Commodity Insights will add some 6.5 million b/d in new capacity to 2030.

Under its reference oil supply scenario, S&P Global forecasts that non-OPEC conventional oil capacity will increase from 46.7 million b/d to 51.73 million b/d by 2030.

Unconventional shale, mainly in the US and Argentina, will add a further 750,000 b/d, putting total non-OPEC oil supply growth at almost 6 million b/d by 2030, for a total of 55.3 million b/d.

Assuming annual field decline rates of 5%, however, new conventional oil projects are also needed to help plug a 4 million b/d fall in current global crude and condensate output from mature fields over the decade.

New capacity additions over the coming decade are dominated by conventional projects in Brazil, Norway, Guyana, Canada and Mexico. Brazil's subsalt giants will add more than 2 million b/d while Norway's major Sverdrup and Castberg projects will add over 400,000 b/d of production through 2025 alone.

"S&P Global Commodity Insights expects that markets will be on an extended pathway of recalibration as supply and demand fundamentals adjust to elevated prices and supply uncertainty. We believe that it will take several years of stronger supply growth than demand growth for inventory cushions to return to comfortable levels," S&P Global oil analysts said in a 2023 recent outlook.

Click here for the full-size interactive: The world's biggest oil projects

More with less

The correlation between upstream spending and future supply capacity is, however, being lessened by efficiency gains, some market watchers point out.

Conventional oil projects are getting larger. Capacity adds by year and by project have been rising over the last several years, S&P Global analysis shows, as producers harness savings from simplified, off-the-self designs, remote power supplies, and unmanned facilities.

"We're seeing a lot more 100,000-200,000 b/d projects and that has a lot to do with operators increasing their development and capital efficiency," said Sami Yahya, senior oil supply analyst at S&P Global Commodity Insights.

Lower project costs and breakeven prices mean more FIDs and S&P Global expects to see a 12% growth in upstream spending this year with operators signing off on 15 major non-OPEC projects.

One supply-side optimist is BP's former chief economist Christof Ruhl who remains sanguine that price signals will keep oil markets balanced in the longer term.

"It almost seems annually [we] hear these cries about an investment gap. Not only is it ill-defined, it also has never once materialized," Ruhl told an industry event on Jan 11. "I am an economist, I still believe the carrot just has to be big enough and the supply is forthcoming as long as there are no physical constraints. And I don't see physical constraint to oil or for that matter to gas or coal supplies."