Energy is capital-intensive, with a long gestation period. In the wake of low investments in the sector during 2014-16 — while the oil markets were in doldrums — many felt a price spike was imminent as markets could get tight due to lack of investment.

That may be turning out wrong, it now seems.

Early last year, at Davos, Saudi Aramco’s chief executive underlined that in order to meet the growing global energy demand, the world needs to invest $25 trillion in new oil-producing capacity over the next 25 years.

He was forthright in his assessment: The global demand for oil and gas will still grow in the coming decades, so if capital investment drops, it could create “spikes” in prices and hurt the global economy. The global oil and gas industry needs to expand and requires more investment, Nasser then emphasised.

He had a point. As per the International Energy Agency (IEA), investment in the oil sector has declined in 2015 and 2016 — the first consecutive annual drop in three decades — by more than $300 billion. Lack of investment coupled with an increase in demand could result in a tight market and surge in oil prices towards 2022 without further action, the IEA report then concluded. All this led the US consultancy Deloitte to project then that the industry will need a minimum investment of $3tr, or $600bn a year, between 2016 and 2020, to maintain its reserve levels.

However, the actual scenario is turning out to be better than anticipated. The US Energy Information Agency (EIA) in its recent report, ‘Capital investment in upstream oil and natural gas industries’, refers to the fact that due to the collapse in crude oil prices by more than 50 per cent between 2014 and 2016, although capital investment in oil and natural gas sector fell by about 40pc. Yet that doesn’t seem to be a cause for concern. “Even though crude oil prices have remained lower than their 2014 levels, the International Energy Outlook 2017 (IEO2017) anticipates a large increase in oil and natural gas production with many large, capital-intensive projects that will come online after 2025 to meet rising demand.”

The report authored by EIA’s Victoria Zaretskaya, Faouzi Aloulou, and Laura Singer added another dimension to the entire debate, underlining that the US tight oil is expected to continue to be a growing source of supply through 2025.

While projecting that conventional oil and natural gas production would continue to grow in the meantime, the IEO2017 also focuses on the development and growth in tight oil, oil sands, deepwater oil, and natural gas development in recent years.

As per the IEO2017, US tight oil is projected to be the fastest growing supply source in the global oil market through 2025, increasing from 4.6 million barrels per day in 2016 to 5.9m bpd by 2025. Between 2017 and 2040, production from tight oil is projected to increase by 3.3m bpd, offshore deepwater by 2.7m bpd, and oil sands by 1.4m bpd, the report added. All these would complement the traditional sources in meeting the growing global energy needs, indeed if at all. And in view of major technological developments, that remains a big if.

Many of these resources, such as tight oil, oil sand, deep water and ultra-deepwater resources, have traditionally been costly to develop and required long lead times before returns on investment were realised. Yet, courtesy recent technological improvements and the high crude oil prices during 2010-14, the development of such resources got a boom.

These technological developments, resulting in lower cost for tight oil and gas production, also impacted other non-traditional energy sources beyond tight oil. In-situ oil sands production also benefited from these advances.

Consequent to all this, other non-conventional sources are also expected to grow. The EIA report underlines that oil sands projects would also emerge as a significant source of global supply over the next 25 years.

And despite the fact that offshore deepwater oil projects have high fixed costs and require long lead times, they also provide large production volumes that can achieve relatively low per-barrel operating costs. In the IEO2017 Reference Case, worldwide production from deepwater fields that are either producing now or under development is expected to reach 7.6m bpd in 2025, and global ultra-deepwater production is projected to reach nearly 9m bpd by 2040.Investments, it seems, are being made — but mostly in non-traditional sources of energy.

A supply crunch may not be just round the corner — one feels like arguing at the moment.

Published in Dawn, February 25th, 2018