The balance between growing demand and sporadic contractions and expansions of supply is a conundrum that the oil and gas sector must manage if there is to be enough investment to meet future energy requirements.

The topic will be discussed at the Association of International Petroleum Negotiators’ (AIPN) International Petroleum Summit set for May 21-23 in Houston.

Oil price volatility is a phrase that sits at the core of oil and gas reality.

Since the oil price crashed in 2014, the “lower for longer” philosophy has crystallized the industry’s thinking. By undertaking a digital transformation and standardization strategy, the industry has slashed the cost of producing a barrel of oil to allow it to prosper at lower prices. But there is one area that has still not recovered, and that is investment. With many final investment decisions being postponed, the sector will struggle to meet demand going forward.

Meeting future demand

“Many people who work in the industry believe that the economic fundamentals of oil and gas are sustainable and that global demand will continue to grow in the foreseeable future, and supply will struggle to catch up,” said Graham Cooper, AIPN president and commercial director of Zennor Petroleum, an operator on the U.K. Continental Shelf. “However, there are some short-term issues. One of them is the downturn in the Chinese economy that is depressing demand growth”.

“Another is the prevalence of U.S. shale oil which distorts supply. But in five years’ time both of those things may be in the past rather than in the present,” Cooper said. “There is a general view that oil prices will stay at or above current levels and maybe even increase.”

Cooper believes that will leave the industry viable and robust, and operators will start investing again in the long-term projects that are needed moving into the next decade.

“What we certainly started to see in the last year when oil prices were between $60 to $80 was that a lot of projects that had previously been put on hold were given the green light,” he said. “Maybe not the real big ones yet but certainly the green shoots of recovery are there as we see more general activity starting with companies who have withheld investment for a couple of years.”

Confusing demand signals

Bill Cline, incoming AIPN president and senior advisor for Gaffney, Cline & Associates, proclaims himself to be an observer rather than predictor of oil prices but believes there are several important factors that will influence it.

One is security of supply, but he agrees with Cooper that geopolitical factors will have a bigger impact.

“The biggest factor is demand,” he said. “It is about what is going on right now in China, the U.S. and Northern Europe, the areas with the highest levels of demand. This is where the growth will come from. There is some uncertainty because of the tensions between the US, China and Russia and the trade tensions particularly between China and the US.

“There is also a lot of uncertainty on the demand side. When you couple that with some supply side confusion: the U.S. re-imposed sanctions on Iran late last year but almost immediately waived 80% of the sanctions or gave them temporary relief,” Cline added. “At the same time the U.S. had gone to OPEC to ask them to bring more oil on the market to avoid an oil spike caused by Iranian shortfall.”

The result was the market replaced the 2 million barrels per day that it expected to lose from the sanctions on Iran that never actually materialized.

“What you ended up with was oversupply because the suppliers are confused by the marketplace,” Cline continued. “So [there is] a little bit of uncertainty on both sides of the equation.”

US influences market

As to where the oil price will end up, AIPN executive director John Bridges is clear that there will be no return to the $100 barrel in the short term.

“Saudi Arabia is already pulling back. It pulled back about 800,000 barrels a day and the U.S. is producing more. EIA [U.S. Energy Information Administration] is projecting the Permian Basin to increase 1 million barrels a day in 2019 and another million in 2020. The U.S. is a capitalistic nation with no restraint or controls on pulling back as long as projects meet a hurdle rate of return on investment,” Bridges said. “So, it can’t really be a swing producer, which leaves OPEC to control the oversupply.

“Though anytime they pull back to maintain price, the U.S. appears to continue to increase production and drill more filling the void,” Bridges added. “In this scenario supply and demand has not achieved equilibrium with regards to current price.”

What appears to be occurring in time is a buildup of behind pipe/valve volume to where OPEC could opt to open the valve to the market, he said. But that, he added, could send some companies into bankruptcy or force additional consolidation through mergers and acquisitions if the price fell too low.

A lower price forces capital constraint on exploration and development, he added.

“At a lower price, supply from the U.S. and elsewhere decreases and demand increases, then it gets you back into your supply demand equilibrium. Yet, this leads to over demand and higher prices in the long term due to curtailment of capital spending and lag time to bring additional production online,” Bridges said. “What folks truly hope for is a soft landing where demand catches up with current supply.”