ENERGY MATTERS © VOL. 6
an opinion editorial written exclusively for ANZMEX
9 July, 2019
By Chris Sladen
Energy matters – if it is under the ground then it is not at the surface!
At a recent energy conference at the Institute of Americas, a leading reporter from Mexico asked me to explain how much investment was needed to meet the targets for oil and gas production? I said that a reasonable estimate would be slightly over US$ 40 billion every year. It is an extraordinary amount of money, more than double what is currently being spent by both the State and private companies together.
The reporter said I only had 90 seconds to explain! There is some logic to reach this big number though of course there are many many assumptions, and ranges on costs and prices. So here is my short explanation of why gigantic investments are needed to turn the industry around:
If the target is to reach 2.4 million barrels of oil production by 2024, and current production is down to around 1.65 million barrels per day, then by 2024, Mexico needs to add around 750,000 barrels production per day. Adding production of this amount might need an additional reserve base of around 2 billion barrels. A simple assumption would be to find 1 giant field per quarter, equivalent to 250 million barrels of reserves. This is the equivalent of adding 1 billion barrels per year, giving a reserves replacement ratio of just over 100% of what is produced, so this can create a sustainable long term reserves base. If the finding cost of additional reserves was, say, US$ 2.5 per barrel, then this would need around US$ 600 million per quarter (250×2.5). But remember, many exploration wells find nothing, and not every new discovery is commercially viable. If the success rate were say 1 in 4, then there is another US$ 1800 million per quarter of failed exploration. So in total, around US$ 9.6 billion per year would be needed to continually replenish the reserves base.
Then there is the development of those new fields with newly discovered commercially viable reserves. If this costs around, say, US$ 20 per barrel, then this requires a development spend of around US$ 20 billion per year, particularly if one accepts that the easy to extract barrels have already been found and much of the new reserves and production will come from deep water fields, and if one wants to sustain the production targets beyond 2024. So the total cost of finding and developing new production and reserves becomes US$ 29.6 billion per year.
It is important to not forget the current base production of around 1.65 million barrels per day, because this production will continue to fall, as is natural. If this natural decline was at, say, around 5% per year, this would be equivalent to around 80,000 barrels per day. To replace this production might need the equivalent of a field of around 200 million barrels reserves, every year. To find such a field each year, would take around US$ 500 million per year of exploration (US$ 2.5 per barrel finding cost) and then there is the failed exploration of US$ 1.5 billion per year (1 in 4). And the development cost would be around US$ 4 billion per year (US$ 20 per barrel). So the total cost of replacing the natural decline is around US$ 6 billion per year. So, this now brings the total to US$ 35.9 billion per year.
There is then the issue of continuing to produce the base production. Has there been sufficient investment to ensure these discovered barrels can be produced? The most likely answer is no, because many of these remaining discovered barrels are difficult to get to, often now requiring additional enhanced oil recovery (EOR) technologies such as handling of produced water, injection of water and gases to maintain reservoir pressures, the injection of chemical stimulants to help oil to flow, thermal recovery techniques, the drilling of highly sophisticated wells, the handling of increasing associated gas production often enriched in nitrogen, and transporting & processing multiphase fluids. If we assume US$ 10 per barrel are needed to add a variety EOR technologies, wells and equipment, and the remaining base production is 1.55 million barrels per day (565 million barrels per year), then an additional US$ 5.6 billion per year are needed. So this brings the total to US$ 41.5 billion per year.
At this point, many experts will step forward to tell you that my calculations are rubbish and criticise my estimates. And some of their points may well be valid. I have kept it very simple; remember, this is a 90 second summary. Maybe the industry only needs US$ 35 billion, maybe US$ 30 billion, or less each year. In my defence, I simply note that oil production has fallen every year for 15 years, since 2004. So the industry is clearly not investing enough.
If the industry does need around US$ 40 billion per year to get to the stated targets, then it is currently severely underspending. The total of all upstream investment in Mexico (public and private together) is under US$ 20 billion per year. So if the industry is underspending this year by US$ ~20billion, you can see that the problems will soon mount up. For example, if the industry underspent by say, just, US$ ~10 billion per year, then over a decade, that equates to US$ ~100 billion of under-investment. It is a short step to realise that this is the underlying cause of so many issues for Mexico’s oil and gas production. Starved of investment then decline is inevitable; the industry has been under-invested for decades, and continues to be. To turn the industry around needs long term sustained investment; the issue of whether it is publicly or privately funded investment is something else. The scale of the challenge suggests that both sources of investment are needed.
Oil in the ground doesn’t know who on the surface is spending money on finding and extracting it. There are no magic tricks to lure oil out from underground. The reality is that if you do not invest, then oil stays in the ground. There are reasons for the name ‘Big Oil’ to characterise large oil companies. Companies have that name partly because big investments are required to do big projects, and to make big additions to production.
About the author:
Mr. Chris Sladen runs an advisory service offering insights to inform, shape a decision, and guide the next steps for energy ventures. Chris has a unique global experience having worked in the energy sector of over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris had a career of over 37 years with BP, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK.
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