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Oil and gas project spending needs to increase by 20%, says WoodMac

An oil platform.
An oil platform.

Future spending on oil and gas projects will need to increase by around 20% in the next decade  in order to meet demand, according to a leading consultancy.

Wood Mackenzie said recovery from the recent downturn has been much slower than in previous cycles and annual spending is around £77billion too low to sustain production and ensure future demand growth.

The firm predicts annual spending will reach £386.5billion in the early 2020s.

This is far below the peak of £579.8billion peak in 2014 and WoodMac said this needs to increase to at least £463.8billion through the next ten years.

Key to this will be exploration success, according to the consultancy, in order to replenish “depleted conventional inventories”.

WoodMac said yet-to-find volumes offer “great potential” but exploration budgets were slashed by 60% in the downturn and are yet to recover.

Despite a pick-up in US shale and LNG projects, “bigger and better conventional projects” will ultimately be required to meet demand.

Currently, global pre-FID (final investment decision) conventional reserves only cover two years of oil and gas production, said WoodMac.

The firm’s senior vice president for corporate research, Tom Ellacott, said: “Four years of deep capital rationing have had a severe impact on resource renewal, especially in the conventional sector.

“Companies are rightly cherry-picking the best conventional projects in their portfolios for greenfield development. But not enough new high-quality projects are entering the funnel to replace those that have left.”

Mr Ellacott expects the recovery in spending on conventional projects to remain slow, at least in the short-term.

He added: “Many companies will justifiably be concerned about committing substantial capital to long-term projects with peak oil demand and energy transition risks within the investment horizon.

“There’s also a prevailing mindset of austerity designed to appease shareholders — investment is lower in the pecking order for surplus cash flow than dividends and buy-backs.”

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