Global oil and natural gas development spending needs to ramp up by around 20% to meet future demand growth and sustain production into the 2020s, with only U.S. tight oil supply from the Permian Basin looking like a sure thing, Wood Mackenzie said Wednesday.

Research found the recovery since the oil price collapse four years ago has been “much slower and shallower than in previous cycles.”

Development spending is expected to climb by 5% this year after increasing 2% in 2017. However, investments should climb to slightly more than $500 billion by the early 2020s. That compares with a peak of $750 billion in 2014, before prices collapsed, and from a low of $460 billion in 2016.

“Companies will need to start investing again to sustain their business,” said Wood Mackenzie’s Malcolm Dickson, director of upstream oil and gas. “But decision making will be fraught with uncertainties, the oil price and energy transition not least among them.”

Tom Ellacott, who is senior vice president of corporate research, said since 2014 the “deep capital rationing” has severely impacted “resource renewal, especially in the conventional sector. Companies are rightly cherry-picking the best conventional projects in their portfolios for greenfield development. But not enough new high quality projects are entering the funnel to replace those that have left.”

As a result, conventional growth inventories contracted during the downturn.

Global conventional reserves, pre-final investment decisions (FID), now are estimated to cover only two years of oil and gas production. A wave of big liquefied natural gas projects is coming, but capital investments in conventional, deepwater, U.S. unconventional gas and oilsands “will be well below pre-downturn levels.”

Only the tight oil supplies from the United States, driven by the Permian, are set for “consistent investment growth” for the next few years, researchers said.

That would result in a corporate sector divided by the U.S. tight oil “haves,” with a strong outlook for investment and growth, and the “have nots,” most of which face a constricted production challenge in the 2020s.

To kickstart an investment cycle, Wood Mackenzie calculated that annual development spend would need to increase to around $600 billion to meet future demand for oil and gas through the next decade.

However, the rush to reinvest may be a nonstarter, Ellacott said.

“Many companies will justifiably be concerned about committing substantial capital to long-term projects with peak oil demand and energy transition risks within the investment horizon,” he said. “There’s also a prevailing mindset of austerity designed to appease shareholders — investment is lower in the pecking order for surplus cash flow than dividends and buybacks.”

Strict capital discipline may continue to frame investment decisions, at least in the near term, according to Wood Mackenzie, which would favor short-cycle, higher-return opportunities.

“The performance of U.S. tight oil will be critical,” according to researchers. “U.S. tight oil spend peaks in 2023 at a level 20% higher than 2014 in our base case. Outperformance in the Permian could drive upside to this figure.

“But there are also downside risks that will need to be carefully managed to ensure tight oil does not fall short of expectations.”

Ultimately, “bigger and better” conventional oil and gas projects will be needed.

“Around half of the reserves in our pre-FID project dataset need oil prices above $60/bbl to achieve a 15% return. In this disciplined world many companies are screening new projects on long-term oil prices well below spot.

“Further progress in project re-scoping, digitalization and better fiscal terms will all need to play their part in getting these projects over the line,” researchers said.

Exploration success also will be crucial to replenishing depleted conventional inventories, they noted.

“Yet-to-find volumes offer great potential. But exploration budgets were slashed 60% during the downturn and have yet to recover. Spend will need to increase to deliver the required volumes to drive higher investment.”