A new report from Wood Mackenzie challenges concerns about underinvestment in the upstream oil and gas industry. The report, titled Enough is Enough? Debunking the myth of upstream investment, indicates that peak oil and gas demand in the 2030s can be met without a significant rise in current annual investment levels of $500 billion.
According to the report, current spending in the upstream sector is just over half of the $914 billion peak seen in 2014 (in 2023 terms). This apparent gap has led to widespread fears of underinvestment and an impending supply crunch. However, Wood Mackenzie’s Head of Upstream Analysis, Fraser McKay, disputes this notion, stating that the industry is expected to meet recovering demand without repeating the inefficiencies of the early 2010s.
Oil demand, which rebounded from pandemic lows, is predicted to surpass pre-pandemic levels in 2023. Wood Mackenzie forecasts that demand growth will slow from 2024, reaching its peak at 108 million barrels per day (b/d) in the early 2030s. Interestingly, the report claims that spend levels only slightly higher than the current run-rate can adequately meet demand through its peak and beyond. The reasons behind this optimistic outlook include the development of low-cost oil resources, strict capital discipline, and substantial improvement in investment efficiency.
The industry’s ability to adapt to adversity was a key factor in the shift towards greater supply efficiency. Price shocks experienced during 2015-2016 and 2020-2021 compelled the sector to adopt more rigorous capital management practices. Consequently, conventional greenfield unit development costs have dropped by 60 percent in 2023 terms, and US tight oil wells now produce nearly three times more than they did in 2014, using the same amount of capital. Technological advancements, capital efficiency, and modularization have played a crucial role in these improvements.
Wood Mackenzie predicts that most of the oil and gas investment for the rest of the decade will target advantaged resources, focusing on low-cost, low-emission, and low-risk prospects. Beyond that, new supply sources may become more expensive to develop. To meet demand, the industry will increasingly depend on late-life reserves growth from existing sources, higher-cost greenfield developments, and undiscovered volumes.
Surprisingly, even beyond peak demand, the report suggests that the current half-a-trillion-dollar run-rate will need to be maintained. However, alternative demand scenarios and potential risks to the required investment could lead to different outcomes, and Wood Mackenzie acknowledges that efficiency and investment strategies may evolve over time.
The report highlights the importance of the energy transition, with Wood Mackenzie’s base-case Energy Transition Outlook (ETO) aiming for a 2.5°C pathway. Even in their more ambitious Accelerated Energy Transition outlook for a 1.5°C trajectory, substantial investment, approximately $400 billion per year in the 2020s and nearly $250 billion a year in the 2030s (in 2023 terms), will still be necessary.