Global oil markets projected to tighten by 2020-21, driven by decline in projects reaching final investment decision

September 2017 | Anna Nikitina and Evelina Pagkalou


While the global oil price downturn caused a rapid decline in the number of projects achieving final investment decisions (FIDs), signs of recovery are starting to show. Nonetheless, crude volumes that are forecasted to come online are significantly lower than in previous years. This could lead to the oil market tightening in the next 3-5 years, with crude prices temporarily reaching USD70/bbl in the medium term. Deepwater projects could provide an upside to the global output but would struggle to address the supply gap.

Upstream investment cuts will likely cause crude undersupply in the medium term

Global upstream investment suffered dramatic cuts in the low-oil-price environment, which, in turn, caused global FIDs to plummet. Upstream oil and gas capex fell from ~USD800 billion in 2014 to ~USD400 billion in 2016, and global exploration and appraisal spending also fell by 40% to USD11.2 billion between 2014 and 2016. At the same time, only half as many projects received investment decisions in 2016 as did in 2014.

While global FID numbers are showing signs of recovery in 2017, it is the smaller projects, which require less capital, that are being brought onstream. We assume that spending cuts will result in 50-60% lower volumes coming online from new projects in the next 3-5 years, compared to the 2010-14 average.

Consequently, we expect that lower volumes coming online will contribute to market tightening in the next 2-3 years. Production from new projects that reached FID after 2014 is not enough to tackle the supply gap. In fact, in filling this gap, over 60% of new non-OPEC production will come from projects that reached FID before 2014.

Deepwater projects could provide an upside to the global output but would struggle to address the supply gap

We see deepwater offering a possible upside to global supply, as its projects sanctioned in 2017 are bringing higher volumes online than those sanctioned in 2014, aided by cost compression under low oil prices. Although no large deepwater projects received FID in 2016, improved market conditions in 2017 pushed more large deepwater FIDs than in 2014. Those mega projects, such as Mad Dog Phase 2, further lowered their breakevens by spreading costs over a larger base. Meanwhile, smaller deepwater projects only suffered a minor setback with 19 projects going forward in 2016 and 2017, compared to 22 in 2014. Most of those are tie-backs, which allow for improved economics. For instance, in June 2016, Woodside Energy sanctioned Australia’s Greater Enfield, which will tie into Ngujima-Yin FPSO. Similarly, Shell’s Kaikias in the Gulf of Mexico will tie into the Ursa production hub, which, according to operator estimates, will result in a breakeven lower than USD40/bbl. Overall, deepwater considerably benefitted from engineering design simplification and the ability to lock in low rig rates, bringing breakevens below USD50/bbl. In addition, despite the downward trend in offshore floater rig utilization, the ones that remained tend to be the most powerful and efficient, thus providing further cost savings.

However, while we expect 2017 deepwater FIDs to deliver over 500 kb/d by 2022, those volumes will still not be sufficient to address the global supply gap. Under our base case scenario, crude prices may, therefore, escalate to around USD70/bbl between 2022 and 2024, after which further rebalancing would bring them down to the USD60-65/bbl range in the longer term.



About the authors

Anna Nikitina is a Senior Analyst in McKinsey Energy Insights' Wroclaw office and Evelina Pagkalou is a Specialist in McKinsey Energy Insights' London office.



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