Oil prices may be slumping of late, but fewer global startups in the next two years at a minimum may pressure supply growth around the world, according to Raymond James & Associates Inc.
Analyst Pavel Molchanov, in collaboration with the U.S. and Canadian research teams, said an average 2.0 million b/d a year of long lead-time oil projects came online from 2015-2019. For at least the next two years, it’s a different story.
“For 2020-2022, our bottom-up analysis points to 1.1 million b/d per year, including a noticeable trough period over the next two years,” Molchanov and his team said. “Moreover, our bias is to the downside, bearing in mind the likelihood of construction delays.
“At a macro level, this represents yet another reason why the current level of industrywide capital spending will ultimately be insufficient to accommodate global oil demand growth.”
Coronavirus-related fears about oil demand are crowding out news related to the supply side of the oil market equation, but “it nonetheless bears repeating that the supply picture for 2020 and 2021 is looking very bullish” because of the slump in project startups.
The pace of project ramp ups is slowing, confirming a Raymond James view that supply from sources outside OPEC, the Organization of the Petroleum Exporting Countries, and from U.S. supply, may flatten or even decline in the medium term.
“Combined with the productivity slowdown in U.S. shale, this points to the need for sustainably higher oil prices to stimulate more industrywide capital spending,” analysts said.
Global oil output in 2020 and 2021 should be less than half the average seen in the past five years of 2.0 million b/d per year.
Analysts compiled a list of nearly 200 oil-centric development projects across every continent that began operating from 2015 through 2019. They also filled in the blanks on pre-production projects expected to come online in 2020 and beyond.
Projects have a ramp-up period before they reach full capacity, so the amount of capacity starting up in any given year may not equal the actual production contribution, they noted. Still, the big picture is evident, as the industry has begun a period when the amount of capacity coming online should be much lower than in recent years.
“The amount of capacity that started up during 2015-2019 was 9.8 million b/d, or 2.0 million b/d per year,” analysts said. “By contrast, what is scheduled to start up over the next two years combined is only 1.6 million b/d.”
The estimated startups represent a best-case scenario on the assumption that all construction moves forward in line with forecast plans. If delays were to emerge, the planned capacity additions could be optimistic, analysts noted.
While most projects are not OPEC-related, there is some readthrough for the U.S. Gulf of Mexico (GOM) too. The second phase of BP plc’s Mad Dog facility in the GOM deepwater is expected to begin producing 120,000 b/d in 2021. Royal Dutch Shell plc’s deepwater Vito project is set to ramp in GOM deepwater, also in 2021, with output of 100,000 b/d.
For Canada’s onshore, growth is forecast to be fairly resilient, analysts said. First, this year should see incremental growth projects coming online in the oilsands business, notably Imperial Oil Ltd.’s 40,000 b/d supplemental crusher.
Second, Alberta's government introduced mandatory production curtailments in late 2018 in response to extremely wide differentials, which means “essentially all the capacity additions from 2019 will ramp up during 2020 and 2021,” analysts said.
The government plans to gradually ease curtailments and implement a special production allowance, which would allow operators to use crude-by-rail to produce above mandated production levels.
This would allow Canada to maintain trend-level production growth for the next few years, after which new pipeline capacity is expected to come online, likely kickstarting incremental production capacity additions focused on debottlenecking existing operations.
Meanwhile, there are projects scheduled for Canada’s offshore, too, including Husky Energy Inc.’s West White Rose Expansion. The 75,000 b/d facility is scheduled to come online in 2022, extending a resurgence in east coast offshore growth.
Saudi Arabia, meanwhile, is to see the world’s largest oil project start up in the next three years at Marjan, according to Raymond James. The 300,000 b/d expansion is scheduled to start up in 2022. A “close second” is to be Chevron Corp.'s 260,000 b/d Tengiz expansion in Kazakhstan, also set to begin operating in two years.
Most projects scheduled to begin operating in 2023 and beyond have not yet been sanctioned, and forecasting beyond that time would require guessing, analysts said. There also are “more than a dozen areas where frontier exploration has been taking place in recent years, but for a variety of reasons, success has tended to be elusive.
“The hurdles range from geographic remoteness (Falkland Islands), to weather challenges (Greenland), to regulatory complications (Uganda).” The only realistic approach is to “believe it when we see it.”