According to McKinsey Energy Insights (MEI), the global oil market could tighten by 2020-21 due to a declining number of exploration and production projects reaching a final investment decision (FID).
The oil price crash caused a rapid decline in the number of projects achieving a FID between 2014 and 2016. Upstream oil and gas capital expenditure (capex) fell from approximately USD800 bn in 2014 to around USD400 bn in 2016. Global exploration and appraisal spending also fell by 40 percent to USD11.2 bn between 2014 and 2016. At the same time, only half as many projects received investment decisions in 2016 as did in 2014.
While global FID numbers are showing signs of recovery in 2017, it is the smaller projects, which require less capital, that are being brought onstream. MEI says the oil volumes that are forecast to come online are significantly lower than in previous years, which could lead to the oil market tightening in the next three to five years. MEI says crude prices could temporarily reach USD70 per barrel in the medium term.
However, MEI sees deepwater exploration projects starting to recover after three years in the wilderness. Projects sanctioned in 2017 will bring higher volumes of oil online than those sanctioned in 2014. Although no large deepwater projects received FID in 2016, improved market conditions in 2017 have resulted in more large deepwater FIDs than seen in 2014. Mega projects, such as Mad Dog Phase 2, further lowered their respective breakeven points by spreading costs over a larger base. Meanwhile, smaller deepwater projects only suffered a minor setback with 19 projects going forward in 2016 and 2017, compared to 22 in 2014.
For example, in June 2016, Woodside Energy sanctioned Australia’s Greater Enfield, which will tie into Ngujima-Yin FPSO. Similarly, Shell’s Kaikias in the Gulf of Mexico will tie into the Ursa production hub, which should result in a breakeven of lower than USD40 per barrel.
However, MEI does not expect the exploration projects approved in 2017 will generate sufficient amounts of oil to address the global supply gap. In its base case scenario, crude prices may escalate to around USD70 per barrel between 2022 and 2024, after which further rebalancing would bring them down to the USD60-65 range in the longer term.