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Poor oil discovery rates indicate future shortfall

31/08/2016 by Usha Tyagi

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The latest findings from the oil and gas industry show that thanks to exploration budget cuts, oil discoveries have dropped to a 70-year low. This not only signals that there is likely to be a future shortfall, but also that prices could rise as a result.

In the newest figures, it was shown that only a tenth as much oil has been discovered in 2015 as compared to the average annual amounts dating back to the 1960s. After the price collapse in 2014, oil prices remain discounted by more than half. As a result, exploration budgets have been slashed, and that means that just 2.7 billion new barrels were discovered in 2015. This is the least amount since 1947, consultants Wood Mackenzie Ltd said.

The shortfall comes during a period of increasing oil demand. In fact, the US Energy Information Administration suggests that 105.3 million barrels will be required by 2026 – significantly up from today’s 94.8 million barrels. Unfortunately, though US shale efforts could help to alleviate some of the pressure, with the price of a barrel still below $50, substantial growth in that market has been stymied.

Oil prices can be expected to rise, however, thanks to the future shortage. In fact, in decades to come, when the low current exploration rates begin to cause problems for productivity, there is significant potential for prices to soar. Statoil ASA Chief Executive Officer Eldar Saetre said: “Exploration activity is among the easiest things to regulate, to take up and down. It’s not necessarily the right way to think. We need to keep a long-term perspective and maintain exploration activity through downturns as well, and Statoil has.”

Prices for oil remain extremely low, with the price advancing by 0.6 per cent on Tuesday 30th August to reach $49.57 per barrel. However, this is unlikely to continue in the long term, with Petroleo Brasileiro SA Chief Executive Officer Pedro Parente saying: “Considering the reduction in the prices, you have to be looking to every dollar you are spending. It can’t continue forever, because then what we’ll see is a spike in prices in the future.”

Certainly, for now, it seems as if prices will remain low and, as a result, exploratory operations will remain subdued. However, if future demand is to be met without causing significant shortfalls that perpetuate a sudden spike in prices, it is essential for the oil and gas industry to continue looking for further reserves. 

 

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