Oil and Gas

Conventional Oil and Gas Discoveries Hit 70-Year Lows

It would seem that electric vehicles are taking over from internal combustion engine (ICE) vehicles at the right time. Or should I say, just in time?

Whether you invest in oil and gas or drive an ICE vehicle, you should pay close attention to this trend. I’m talking about the big decline in conventional oil and gas discoveries.

Over the last three years, new oil discoveries hit a 70-year low, according to an IHS Markit report. And there is no indication there is going to be any kind of rebound.

The lack of discoveries is a direct result of a pullback in wildcat drilling over the last decade. It’s a trend that could have long-term effects.

A wildcat well is one drilled in a newly identified oil field. Wildcat wells are high-risk, high-reward undertakings.

In 2014, wildcatters sunk 161 new field wildcat wells. During 2018, that number plummeted to just 68.

Why did wildcatters dial back on their drilling rigs? Simple economics.

During periods of low oil prices, drillers tend to drill less, but consumers tend to buy more. This eventually reduces supply.

That, in turn, will cause prices to drift back up. That encourages more drilling, and the cycle repeats.

Another factor is the expense of deepwater oil fields. It’s true that oil and gas basins discovered in deep water are larger. But the expense to get to the oil and gas can be five times greater when compared with a shallow water well.

Today, most drillers are expanding existing fields instead of opting for expensive deepwater projects.

But deepwater drilling isn’t the only drilling that is slowing down. Unconventional shale well drilling is down too.

Unfortunately, new field discoveries aren’t keeping pace with consumption. In fact, crude’s resource replacement ratio is just 16%.

That means for every six barrels of oil being consumed, only one is being replaced with oil from a new resource.

Last week, the U.S. oil rig count was 713, according to Baker Hughes. That’s 160 fewer rigs than a year ago.

This is a trend with obvious consequences. At today’s prices, crude production from shale fields just won’t be growing as fast as it has over the last decade.

Up until this point – and much to my delight – American exploration and production companies have continued to take market share from OPEC and Russia. But that may be coming to an end.

Goldman Sachs recently cut its estimates for the growth in U.S. shale for 2020 and beyond. The firm expects 2020 shale oil production growth of just 700,000 barrels per day, a decrease of 36%. That’s a significant slowdown.

There are plenty of geopolitical factors that can also affect the demand for oil and would ultimately result in more drilling. But the long-term trend is lower production.

I have written about this previously. As demand due to EV adoption drops, so will production.

If you’re an investor in the oil and gas sector, you need to be aware of these long-term trends that are now becoming a reality for oil and gas companies. 

Good investing,

Dave