The global oil and natural gas market today may be oversupplied, but as oilfield service (OFS) capacity is reduced, the lack of investment could turn the market upside down within a few years, according to research.

Rystad Energy calculated in December that the oil and gas industry needs to replace 34 billion bbl of crude every year, equal to current consumption. However, investment decisions for only an estimated 8 billion bbl were made in 2015, less than 25% of what the global market requires longer term.

Managing Partner Jarand Rystad noted that oil prices in December continued to decline after the Organization of the Petroleum Exporting Countries, OPEC, failed to reach an agreement on output targets and the cartel removed its output ceiling (see Shale Daily, Dec. 4, 2015).

“This decision occurs at a time when oil companies are in the process of taking final decisions on spending programs for next year,” Rystad said.

Exploration and production spending fell by $250 billion in 2015 versus 2014, the analyst said. Capital expenditures may fall another $70 billion worldwide in 2016.

“We see that for most new developments oil prices are below lifecycle costs, Rystad said. “As oil companies need to pay dividends and have incompressible taxes and royalties, the majority of upstream players are destroying value as we speak and do whatever they can to cut costs. As a result, billions of barrels of crude are not being matured while global consumption growth is still very robust.

“Thus, a new shortage of crude is likely to come a few years down the road. When this happens, the oil service capacity will not be there to support the growth at the pace needed. There is then a risk that we will face a new era of steep cost inflation which again will drive up oil prices too much and negatively impact the global economy.”

Research by Rystad found that prior to the December price decline, the number of jobs in the OFS industry had fallen by 16% for the top 50 global providers. These OFS firms had aggregate revenues of $300 billion and 950,000 employees in 2014.

“To date, 150,000 employees have been laid off from these 50 companies alone with an estimated 250,000 oil service employees from the top 400 oil service companies globally,” he said.

The Federal Reserve Bank of Dallas recently estimated that about 70,000 U.S. energy sector jobs have been lost since October 2014, a 14.5% decline year/year (see Shale Daily, Dec. 28, 2015).

“I am concerned that current job cuts could lead to a severe shortage of oil service capacity in a few years,” Rystad said. “It is very easy to get rid of people, but it will take a lot of effort and cash to bring people back to the industry.

“A responsible action from petroleum nations would be to stimulate the oil price in the short term in order to incentivize drilling and field development globally and stop downscaling of oil service capacity.”