OPEC producers key to world supply through to 2040

Wood Mackenzie sees OPEC maintaining its role as a key oil supplier through to 2040, although output from non-OPEC producers will help ensure adequate supply in the years to 2030.

In its Macro Oils Long-Term Outlook H1 2018, the global natural resources consultancy says it expects the US Lower 48 to enjoy continued growth through the medium-term, with its crude and condensate production reaching a plateau of over 11mn b/d in the mid to late-2020s. Once the US plateaus, total non-OPEC liquids production will lose its growth momentum and begin to decline post-2030.

With demand continuing to grow through to its peak in the mid-2030s, the industry must find increasingly expensive oil to offset declines from a maturing asset base. To balance the market in the long-term, there is increasing reliance on OPEC continuing to exploit its available reserves.

The consultancy says that as reliance on OPEC ramps up, so does the importance of geopolitical risk as a key determinant for both supply and price.

‘As non-OPEC production growth slows and the importance of OPEC’s output increases from 2023, OPEC’s role in managing prices becomes more focused on ensuring upstream investment keeps up with replacing lost barrels from onstream declines, and the growth in oil demand over the next decade or so,’ it says.

However, the consultancy points out that growth in US Lower 48 crude oil production has been relentless. Activity surged in the last 18 months, supported by rising crude oil prices and a continuation in intensity and pace of completions. Strong rig additions through early-2018 have translated into supply gains – annual average Lower 48 growth in 2018 is forecast at 1.3mn b/d. Overall, the US Lower 48 will add 4.2mn b/d of crude oil and condensate to global supply by 2025.

‘While the pace of growth eases over the next five years, onshore Lower 48 crude oil production remains the key driver of global oil supply growth into the middle of next decade. Crude oil and lease condensate production grows from about 7mn b/d in 2017 to 11mn b/d in 2024, reaching a peak of 11.7mn b/d in the early-2030s,’ the report notes. 

US oil supply is dominated by the Permian Basin throughout the forecast period. Total conventional and unconventional production from the basin reaches 6.3mn b/d, or 56% of total US Lower 48 crude in 2035.

Global upstream investment plummeted by about 50% in the wake of the oil price collapse. The expectation was that this would have a material impact on supply to 2020. However, non-OPEC supply has proven itself to be remarkably resilient. Wood Mackenzie expects it to remain resilient with non-OPEC supply set to remain broadly flat to 2030 outside of the US.

Self-help measures have boosted operating efficiencies, and production momentum from projects launched prior to the price crash – some with zero decline such as the Canadian oil sands and Brazilian deepwater – will keep decline rates around 5% until the end of this decade. The near-term ramp-up in US tight oil production will more than compensate for the sharp fall in new project sanctions during 2015–2016.

But how robust is the pipeline of new conventional projects and what prices are needed to incentivise development into the longer term? US onshore supply cannot meet global demand growth on its own, and conventional projects will play a critical role in filling the supply gap.

Brazil and Canada underpin medium-term conventional non-OPEC supply growth, adding the most production outside of the US by 2030. A strong pipeline of pre-salt developments sees Brazil's production grow each year to 2030 by an average of 130,000 b/d. Canada has seen a recovery in drilling rates and production continues to rise from oil sands projects. Output is forecast to increase a further 750,000 b/d over the next decade.

Russia's production increases into the early 2020s, after the restrictions from production cuts are lifted, before reverting to decline. Some mature provinces, such as the North Sea, will be able to maintain output levels into the mid-2020s. From the mid-2020s, new producers including Guyana, Uganda and Kenya begin to add significant volumes, rising to around 700,000 b/d combined. This all helps to counter structural declines from mature producers through 2030, most notably China, Indonesia, Colombia and Mexico, where declines amount to around 2mn b/d.

So how has the outlook for new conventional projects changed? A marked uptick in major project sanctions towards the end of last year suggests confidence is returning to the upstream sector. A total of 32 project sanctions in 2017 resulted in close to 6bn barrels of liquids reserves reaching FID (final investment decision), double the reserves sanctioned in 2016.

This recovery in conventional projects will continue; at least 30 major project FIDs are expected in 2018. So far this year, 15 projects have been sanctioned. Within the project pipeline, there is potential for up to a further 20 FIDs by the end of the year, according to Wood Mackenzie. This points to a swelling hopper of new commercial conventional developments, which will help bolster non-OPEC supply. 

New projects are now smaller, reflecting the trend towards incremental projects and phased developments. Average project liquids reserves have decreased from around 500mn barrels pre-price crash to about 230mn barrels in 2017.

There has also been a significant shift in the time it takes new projects to reach peak production. Pre-price crash projects averaged nine years to reach peak production from the year they received FID. Now, projects are forecast to reach peak production five years from FID as operators aim for faster project payback. This acts to lessen the post-2020 effects from the sharp downturn in new project sanctioning during 2015–2016. Although the projects are smaller, they will deliver a stronger production impact within a five-year timeframe.

How does the cost of supply evolve as we move into the longer term? By the late-2020s, non-OPEC supply is reliant on additional new sources of supply from reserves growth, contingent resources, and yet-to-find volumes. Although reserves growth is relatively cheap by its nature, other forms of supply are expected to be higher cost. By 2030, around 6mn b/d of supply is expected to break even above $70/b. This is made up of predominantly yet-to-find, contingent resources, and fringe plays in the US Lower 48 onshore. By 2040, 11mn b/d of supply has a breakeven higher than $70/b.

Frontier basins and further exploration play a key role in the longer-term outlook. By 2040, non-OPEC yet-to-find and frontier production contribute 12mn b/d to the supply outlook. Key regions like Latin America and West Africa hold vast potential, but higher prices are needed to support activity as the cost curve is now higher.