If you’re like me, 95% of your attention is focused on U.S. oil & gas. Probably 95% of that 95% concerns unconventional plays, metrics, news, and activity.
What’s happening in the rest of the world?
We all know that unconventional resource development is increasing the supply of oil and natural gas produced in the U.S. Restatements of recoverable reserves to the upside in the Permian and other play areas paint a picture of continued supply to meet demand.
However, the U.S. Energy Information Administration (EIA) predicts the U.S. oil supply will level out in 2023.
World supply is projected to begin declining in 2022, as shown in the slide below from this Seeking Alpha article.
What about demand?
Wall Street has assumed that current worldwide economic growth models tied to weakness in the Chinese economy will, at some point, disappear and demand growth for liquid hydrocarbons will resume.
Bank of America Merrill Lynch doesn’t see it this way. An Oilprice.com article (https://oilprice.com/Energy/Energy-General/Bank-Of-America-Oil-Demand-Growth-To-Hit-Zero-Within-A-Decade.html) states:
By 2030, oil demand could hit a peak and then enter decline, according to a new report.
For the next decade or so, oil demand should continue to grow, although at a slower and slower rate. According to Bank of America Merrill Lynch, the annual increase in global oil consumption slows dramatically in the years ahead. By 2024, demand growth halves, falling to just 0.6 million barrels per day (mb/d), down from 1.2 mb/d this year.
But by 2030, demand growth zeros out as consumption hits a permanent peak, before falling at a relatively rapid rate thereafter.
The article ties the projected demand drop to greater market share of electric vehicles, reducing demand for hydrocarbon liquids. However, aging demographics and student debt load in the U.S. also affect demand.
What if these projections of reduced demand are too aggressive? What if highly populated, non-first world countries simply cannot build the electricity-generating capacity and distribution infrastructure fast enough to meet their citizens’ mobility needs?
We then need to re-ask the question: where does new supply come from?
The number of wells drilled and/or producing in the U.S. and Canada is five to seven times the number of wells worldwide.
Every year since 2013, countries around the world have engaged in transactions that conveyed seven to 16 times the amount of acreage in the Permian Basin. In 2014, more than 852 million acres traded hands.
The graph below shows the trends since 2013.
Some of the blocks are huge. For example, Congo’s “Block 02” is about 12 million acres in size.
This is a big, big problem that impedes the efficient and timely evaluation of world reserves.
The lack of support infrastructure outside the U.S. makes international exploration expensive. To offset this risk exploration, licenses are often granted for 10-year terms contingent on the performance of a work program (collect new seismic, drill some wells) and relinquishment of a sizable fraction of awarded acreage after five years.
This means that huge areas of potentially productive basins/plays are being evaluated by ONE operator — and those evaluations take a long, long time. One would likely find 100 plus operators working this amount of acreage if it were in the Permian. Each of them would drill wells, run logs, perforate zones of interest, and rapidly expand the knowledge base about the basin, trap types, and economic viability.
Political stability and a well-functioning legal system that fairly administers the law are key requirements for companies that wish to invest in the world’s oil & gas potential.
Many countries must come to terms with fiscal regime structures that are punitive.
For a quick, simplified perspective look at this chart:
The dotted red line represents 25% — the current, generally accepted upper limit on royalty in the U.S.
With very few exceptions, most countries are taking 50% or more of the produced hydrocarbons from these concessions.
Throw in the lack of infrastructure — roads, pipelines, power, drilling rigs, and crews — and the obstacles to attracting non-domestic capital for E&P development get bigger and bigger.
However, capital investment by forward-looking third-party sovereign nations may be the key to changing this outlook.
For example, the map below shows Chinese (government and private) investment in Africa.
More than 50% of the promised direct investment will be in critical wealth-building sectors — oil & gas, power, and transportation.
The Democratic Republic of Congo has shown a willingness to jumpstart private direct investment by creating special economic zones that promise favorable regulatory oversight and more favorable taxing policies.
Economic zones that emphasize tax breaks for the oilfield service sector could lead to critical mass staging of rigs, open hole logging services, pipe, and other critical infrastructure materials. This critical mass might lead to lower project costs and faster project evaluation.
If other countries would consider following Congo’s lead, the path to a better understanding of world recoverable reserves would be clear.
What are your thoughts on the ability of the international oil & gas business to meet future demand spikes?
How can countries create evaluation programs that quickly identify reserve potential across big licenses?
Let me know at [email protected].
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