Will global markets have enough oil by the end of the decade?
That’s the surprising question that has emerged this week at the energy conference IHS CERAWeek. The leaders of OPEC and the International Energy Agency both warned the oil industry hasn’t sanctioned enough large, long-term oil projects to meet growing demand in coming years. Drillers largely swore off major new projects during the two-year oil bust.
And that probably won’t change in 2017: even with higher oil prices, many companies are still dealing with high levels of debt and the aftermath of a painful oil downturn, said Patrick Pouyanne, the chairman and chief executive of French oil major Total, in an interview with the Houston Chronicle.
“The international independents don’t have the balance sheets today to really go and sanction projects, so there will be a lack,” Pouyanne said. “These players are very important because of the number of companies, and they’re still out – they’re too weak – to really apply the strategy of sanctioning projects.”
That’s the paradox of the oil industry’s investment cycles. When oil prices are high, companies are flush with cash and plow it into offshore platforms. European oil majors Total and BP expect to increase production by a combined 1 million barrels a day this year as they bring online 19 projects – most of them sanctioned before the oil bust.
When prices are low, oil companies could theoretically take advantage of lower labor and equipment costs and begin investing three or four years before prices rise again. But for many independent companies, investing in the downturn has proven too expensive, Pouyanne said.
“It’s a cycle of three to four years, and we didn’t sanction in the last two years, and if we do it again this year, there will be a lack of oil around 2020,” Pouyanne said.
Pouyanne, like IEA executive director Fatih Birol, said he doesn’t believe U.S. shale drillers will be able to increase output fast enough in coming years to compensate for missing international production.
“We don’t know what pace will be,” he said. “The (shale) ecosystem is very reactive to price.”