SCRAPING THE BARREL

Why peak advantage is the defining upstream challenge of our time

The world is not going to run out of oil (or gas) anytime soon.

Total discovered and prospective oil (and gas) resources are more than double the likely demand to 2050. The upstream industry is able to prioritise advantaged barrels to produce lower cost, lower carbon options.

Meanwhile, much of the world’s vast stock of disadvantaged resources can happily stay in the ground. Over two-thirds of commercial undeveloped resource is at risk of never being developed.

Such apparent bounty creates the impression that the industry can relax. Far from it. Truly advantaged resources, with low breakeven (resilience to low prices) and emissions (sustainability in scope 1 and 2 terms) are anything but plentiful. As things stand, we see enough to satisfy only about half of our base-case oil and gas demand forecast to 2050. Even our much lower accelerated energy transition (AET-1.5) demand scenario—which lays out what is needed to achieve the most ambitious targets of the Paris Agreement, keeping emissions within 1.5 °C of pre-industrial levels and reaching global net zero by 2050—will require some disadvantaged supply.

This problem of ‘peak advantage’ looms ever larger and presents a huge and urgent call to action. As recent supply interruptions serve to remind us, we neglect the upstream at our peril. Oil will continue to need huge and sustained investment.

Upstream companies must act now. We see three main investment themesto mitigate this coming shortage of advantaged resources:

Portfolio renewal

New fields are generally more advantaged than old. They enjoy high utilisation of facilities and modern decarbonisation technologies. Exploration is one relatively small but valuable source of new fields, and high-impact wildcatting may persist for far longer than is widely believed.

Decarbonisation of existing assets

Technologies such as facilities electrification and methane escape abatement can improve the emissions of older assets without raising costs too much.

Low-carbon alternatives

Companies can invest to cut oil demand by growing their green energy businesses, including biofuels.

Even together, these three remedies will not be enough to fix the whole upstream industry. Its outlook becomes steadily more challenging as environmental, social and governance (ESG) pressures increase while inventory inexorably matures. We expect a widening diversity of upstream strategies as companies choose between flight or fight.

Those contemplating a retreat from upstream may view peak advantage as a validation of speedier withdrawal. That would leave more opportunity for others opting to double down on the sector.

Most of those sticking with upstream will strive to prop up their portfolio quality as they deplete inventory. Competition will surely intensify as companies scramble for a dwindling pool of advantaged assets. There is simply not enough for everyone to maintain current performance, let alone improve it.

In and of itself, peak advantage will do little to accelerate the wider energy transition. It may support higher prices, but will otherwise not substantially erode oil demand. Peak advantage is a problem that increases the costs and emissions of the industry without making it much smaller.

ARE GLOBAL OIL RESOURCES TRULY ABUNDANT?

If we are indifferent to resource quality, we have plenty of oil to go around. We estimate total discovered and prospective resources at more than 2 trillion barrels. That is double our basecase energy transition outlook (ETO) cumulative oil demand forecast to 2050. It is triple oil demand to 2050 under our AET-1.5 scenario. These estimates of resource surplus are before the inevitable upward creep of volumes in many assets that we expect from appraisal success and improved recovery. With so many options, plenty of the world’s discovered resources will never be produced. Many of its prospects will never be explored.

NEVER MIND THE QUANTITY, WHERE IS THE QUALITY?

Unsurprisingly, hardly anyone talks about peak oil supply anymore. An industry that once fretted it would run out of oil has flipped to worrying it may have to leave much of its resource in the ground.

It was the emergence of tight oil more than a decade ago that did most to ease those supply concerns. Here, it seemed, was an almost limitless new resource to fix the problem over the medium term. Then oil markets increasingly reckoned the energy transition would erode much of long-term demand anyway.

But has the oil industry really secured long-term supply? Not if tight oil is the only new remedy. We now know much more about the likely scale of global tight oil. Production has grown to around 10 million barrels of oil a day from reserves of around 150 billion barrels. Such reserves equate to four years of global oil demand. If peak oil supply was ever a problem, then tight oil has only delayed any such shortfall by a few years.

The peak oil narrative of yesteryear worried about the wrong problem. Abundant resources meant we were never in danger of running out of oil (or gas) in the foreseeable future. But we do have an issue with the affordability (defined by low costs and breakeven) and emissions (defined by low scope 1 and 2) of known resources.

Forget peak oil supply. ‘Peak advantage’ is set to become the defining challenge for the upstream industry over the coming decades.

Known Fields Alone Cannot Meet Oil Demand To 2050

The world is far from the end of the hydrocarbon era. Under our base-case ETO forecast, oil demand peaks in the 2030s before declining slowly to 94 million barrels a day in 2050.

This demand forecast and investment horizon outlook (bit.ly/3kbW3vj) presents a huge call to action, requiring a very active national and international oil company upstream industry over the next three decades. Supply from existing proven developed fields will dwindle to just 10 million b/d by 2050 without future capital investment (left-hand chart).

‘Most likely’ oil supply from all known onstream and undeveloped commercial fields will still only be 40 million b/d in 2050 (righthand chart). Many of these fields are outside the energy super basins (bit.ly/3XEZIiN) that have ready access to decarbonising factors that best enable advantaged supply.

Oil demand under our AET-1.5 scenario is some 20 million b/d lower than that of our ETO by 2035, but will still be 33 million b/d by 2050. Responsible companies hoping for this much better climate outcome face a difficult planning challenge, given the wide difference in demand scenarios.

Life In The Upstream Will Become Harder

The relentless harvesting of advantaged resources leaves ever fewer attractive options remaining. Historically, this situation was largely resolved by full resource replacement from a vibrant exploration sector. But the industry’s capacity for exploration has been permanently reduced, with investment down by more than 70% in a decade. There can be no return to the widespread wildcatting seen before.

The implications of peak advantage are profound and varied:

• Life will become steadily more difficult for responsible operators that care about cutting emissions. That includes almost the entire industry, given the widespread emphasis on ESG factors.

• Competition for the dwindling pool of advantaged opportunities, including high- impact exploration, will surely intensify.

• Industry-leading cost and emissions targets will become steadily harder to achieve. For example, TotalEnergies requires new upstream investments to break even below US$30/barrel and emit less than its current portfolio intensity of 20 kgCO2e/boe. Equinor requires its overall emissions intensity to be less than 10 kgCO2e/boe.

• The decarbonisation of low-cost but high-emissions resources must become a growing investment theme. New technologies could become the game-changers here. But an equivalent theme of investment in currently unaffordable low-emissions resources is unlikely, as high costs are hard to improve through investment.

Peak advantage threatens to raise the long-term emissions intensity of the upstream industry. And because it barely erodes demand, peak advantage brings precious little upside from a climate perspective:

• Direct implications for oil demand are modest. Perhaps full consideration of scope 1 and 2 emissions in supply cost curves and price modelling would point to higher costs. These may nudge prices upward, but any demand impact would probably be marginal.

• Higher emissions intensity increases ESG headaches for producers and consumers alike.

• Upstream companies can also work on alternatives to reduce oil demand. Their most effective demand lever is to boost investment in low-carbon energies, including biofuels.

Extracted from Wood Mackenzie’s report, “Scraping the barrel: Is the world running out of high-quality oil and gas?”, by Andrew Latham, vice-president of Energy Research, February 2023