Ellen Wald | Feb 17, 2022 08:23
Oil prices are higher than they have been in more than seven years, which is generally a good sign for oil companies and the expansion of the industry. However, we are seeing a conundrum in this regard.
With oil prices up at these levels, there should be more and growing exploration and production (E&P), but that's not the case.
According to Amrita Sen of Energy Aspects, the industry needs "at least $520 billion in investment each year" just to keep global production at 100 million bpd. Yet, according to her analysis, the industry is only investing $370 billion.
Why aren’t we seeing more investment and what does this dearth of E&P mean for the market in the long term?
h2 What's Holding Back Exploration & Production/h2In the U.S., production is 1.6 million bpd lower than it was in January 2020, even though prices are at least $35 per barrel higher and thus more enticing to producers.
The oil rig count is still around 500, compared to the nearly 700 oil rigs in operation pre-pandemic. This indicates that output is not growing all that much despite the potential for greater profit.
Dallas Fed Survey and others have told us that U.S. producers are particularly concerned about investing in production for a variety of reasons at the moment. Some of these reasons are unique to the U.S. situation, but others also impact those operating outside the U.S.
For the market, muted production growth means less worry about oversupply in the near future. In fact, in the long term—years from now—we might see a significant supply shortage if producers don’t start investing more in E&P soon.
For the industry, restrained E&P means that the prices of most equities will be high as long as the price of oil is high, but many producers will suffer in upcoming years if they do not find a way to produce. In the years to come, those producers that have invested in E&P, or that can acquire assets ready for production, will have a huge advantage over those that were unprepared for the future.
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