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Oil and gas discoveries hit rock bottom

New oil and gas discoveries have fallen to levels not seen since the 1950s according to Ed Crooks and Andrew Ward in the Financial Times:

“There were only 174 oil and gas discoveries worldwide last year, compared to an average of 400-500 per year up until 2013…

“The slowdown in exploration success shows that the world is likely to become increasingly reliant on “unconventional” resources such as US shale oil and gas to meet demand for energy in future decades.”

The decline partially reflects a fall in investment since the oil price fell in mid-2014.  However, it is also in line with recent HSBC advice to its corporate investors that those discoveries that have been made are in smaller fields and in less accessible areas.

Although HSBC did not follow their report to its logical conclusion, they did note that to maintain economic growth we need to find at least four new Saudi Arabia-sized oil deposits between now and 2040.  Given that the giant Saudi Arabian Ghawar field, discovered in 1948, remains the largest ever discovered, and given the relatively tiny discoveries made in recent years, this seems highly unlikely.

Paradoxically, the financialisation of the oil industry has the perverse outcome that companies will seek expensive unconventional oil and gas in preference to what remains of the relatively cheap conventional deposits.  As Crooks and Ward note:

“Most frontier exploration is now offshore, where a single well can cost $150m, and the success rate for “wildcat” wells has been about one in five…  [but a] shale well onshore can cost $4m-$10m and be brought into production in weeks, as opposed to five or more years for deepwater discoveries.”

Since most onshore wells require hydraulic fracturing, and have a steep decline curve – losing perhaps 90 percent of production in just three years – they require a much higher oil price to break even than conventional and offshore fields (which can produce oil for decades).  However, because they can be brought into production rapidly, they tend to pull investment away from longer-term conventional and offshore projects.  For example, the Permian Basin in West Texas is already reaping the benefits of price rises since the OPEC-Russian agreement to freeze global production last year.

There are two major downsides to hydraulic fracturing, however.  Most obviously, as oil prices increase, more drilling occurs.  This tends to increase the price of services, supplies and labour; rapidly increasing the break-even price.  Second – and less obviously – increased oil prices have a chilling impact on the wider economy, slowing growth and often tipping us into recession.  This, in turn, lowers demand for oil in developed countries, causing another slump in the price of oil.  This is what occurred in 2014 and there is no reason to believe that it will not happen in short order in the event of USA shale oil production increasing once again.

This takes us back to the real story behind Crooks and Ward’s article and the investment advice from HSBC.  The global economy must maintain economic growth if it is to survive.  To achieve this it requires energy.  Despite efforts to increase renewable energy, and in spite of China’s coal binge, at 97 million barrels per day, oil still accounts for a third of the world’s energy; 63 percent of which is used to run the global supply chains.

There is no easy way to wean ourselves off our oil dependency – so far we have merely added renewables to the mix rather than substitute them for fossil fuels; and oil is the least substitutable of all.  But if, in the very near future, oil is going to be in short supply – not because there isn’t oil beneath the ground, but because we cannot secure the necessary investment to recover it – then economic growth is over.  Not today.  Not tomorrow.  But sometime in the 2020s, the industrial age is going to come to an end; not because we chose to change, but because our insane belief in infinite growth ran headlong into the brick wall of the limits of a finite planet.

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