As the risk of a delayed energy transition scenario increases, so does the possibility of a much greater pull on future oil and gas supply. Meeting this demand would require a significant increase in upstream investment, resulting in higher hydrocarbon prices and significant shifts in corporate strategy, according to the latest Horizons report from Wood Mackenzie.
According to the report “Taking the Strain: How Upstream Could Meet the Demands of a Delayed Energy Transition,” a variety of external pressures have weakened government and corporate resolve to spend the estimated $3.5 trillion required to restructure energy systems to limit both hydrocarbon demand and global warming.
Wood Mackenzie’s report focuses on the additional resources and spending required if the upstream sector were to meet higher-for-longer oil and gas demand and the resultant consequences.
Under this scenario, the world would require 5% more oil and gas supply and 30% higher annual upstream capital investment. Liquids demand would average 6 million B/D (6%) more than Wood Mackenzie’s base case to 2050, and gas demand would average 15 Bcfd (3%) more than the base case.
“Meeting rising demand in the near term in either the delayed scenario or the base case poses little challenge to the sector; plenty of supply is available,” said Fraser McKay, head of upstream analysis for Wood Mackenzie.
“However, stronger-for-longer demand growth is a much stiffer ask. A 5-year transition delay would require incremental volumes equivalent to a new US Permian basin for oil and a Haynesville Shale or Australia for gas,” said Angus Rodger, head of upstream analysis for Asia-Pacific and the Middle East.
Increased Upstream Investment Needed
Wood Mackenzie says that, while the global oil and gas sector could meet this demand through existing resources and future exploration, significant investment would be required to achieve it.
Wood Mackenzie estimates that upstream spending would have to rise by 30%, resulting in $659 billion of annual development spending versus $507 billion in the base case and $17 trillion versus $13 trillion in total to 2050 (all in 2024 terms).
“We have calculated the sector’s cost elasticity by integrating our field-by-field annual supply models with our global supply-chain analysis,” McKay said. “This includes an assumption for continued operational efficiency improvements, which the industry could very well outperform, mitigating some of the inflationary impact.”
But increasing spending won’t be easy, even if the signs of increased demand are present. More activity would put significant pressure on the supply chain—parts of which are already running near capacity—and project costs would inflate.
“The industry’s current strict capital discipline edict would also have to change, or, at least, what defines discipline would have to evolve,” Rodger said.
“Corporate planning prices would increase if the outlook for the market improved, with increased confidence in demand longevity. In that environment, higher development unit costs and breakevens would likely be tolerable,” McKay said.
Price Escalation
With the higher cost of supply, so, too, would come higher prices for both oil and gas. Wood Mackenzie’s Oil Supply Model forecasts a Brent price rising to over $100/bbl during the 2030s in a delayed transition scenario. It falls toward $90/bbl by 2050, averaging around $20/bbl higher than the base case over the period (all in 2024 terms).