IEEJ：November 2015

ｃ○ IEEJ 2015

Special Bulletin
A Japanese Perspective on the International Energy Landscape (246)November 20, 2015

Oil Supply Investment under Low Prices and Its Impacts
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn November 17, a conference titled “The Oil Supply Outlook in the New Oil Price
Environment” took place in Oxford of the United Kingdom. As indicated by the title, discussions
there focused on how oil supply will be affected by the new price environment where oil prices have
halved from the first half of last year and are likely to remain low for the immediate future.
Interestingly, a major topic in this respect was how low oil prices are affecting short-, medium- andlong-term investment cycles.
The conference began with presentations and discussions about how low oil prices haveaffected supply in each major country or region. Generally, in oil producing countries other than themembers of the Organization of the Petroleum Exporting Countries, low oil prices have steadily
reduced investment in maintaining and expanding oil production, decelerated oil production growthor cut oil output, according to the discussions. But the situation has differed from country to country.
Among non-OPEC oil producing countries other than the United States, Russia has continued
moderate growth in oil production despite the generally severe economic environment including low
oil prices and Western economic sanctions. This is mainly because ruble-denominated domestic
investment has not declined so much despite a plunge in dollar-denominated oil export income under
the Russian currency’s substantial depreciation, according to some participants in the conference.
One participant noted that as the economic sanctions have made it difficult for Russia to use
advanced technologies for developing oil resources and develop such resources in frontier regions,
Russia has given priority to the development and maintenance of oil output at its present major oil
production areas and achieved success in concentrated or specialized oil production anddevelopment. As a matter of course, low oil prices have gradually undermined the future of Russian
oil production. Particularly, a delay in the development of untapped oil resources in underdeveloped
areas expected to expand oil production in the future may have significant implications. But adominant view at the conference was that Russia may maintain the present oil production level overa short term.
But business conditions for oil production and development are severe in other major
non-OPEC oil producing countries excluding the United States. In British and Norwegian North Sea
oilfields and Mexico, a downward trend in oil production has continued and could deteriorate
depending on future developments, according to some participants in the conference. Although theUnited Kingdom promoted the development of satellite oilfields around earlier-developed oilfields
to help prevent total output from declining under high oil prices, the present low prices are expected
to slow down such development. One participant noted that oil production declines could accelerate
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as new oil development is postponed with investment reduced even in the maintenance of productionamid heavy capital spending cuts at oil companies. The problem of accelerated oil output declines is
not limited to the North Sea. It is attracting global attention amid capital spending cuts under low oilprices.
Even in Brazil and Canada that are expected to expand oil output in the future, low oil
prices have caused capital spending cuts and delays or freezes in oil development projects, indicatingthat production growth could be restricted, according to a participant in the conference. Interestingly,
however, it was noted that due to a relatively longer investment and production cycle, Canada may
continue to expand oil output, with projects subject to investment under high prices starting
production, before low oil prices begin to remarkably affect the production expansion in or after2017. This is an important case where the length of the investment cycle greatly influences thetiming of production expansion.
In this respect, the United States represents a case in which a short investment cycle allows
the low oil prices to affect oil output, particularly shale oil, according to a view given at theconference. The oil price plunge has resulted in a dramatic decline in the number of oil drilling rigs
in operation in the United States, as is well known. But drilling and production have concentrated incore production areas with substantial cost cuts achieved, allowing shale oil production to be moreresistant to low oil prices than expected earlier. In fact, however, low oil prices have caused a drop in
total shale oil production. If oil prices remain low, shale oil output may decline by 1 million barrels
per day from a peak, according to a participant in the conference. Due to the presence of many
uncompleted oil wells, however, another participant noted that if crude oil prices rose back to $60
per barrel or more, production starting at uncompleted wells would allow overall output to expandby 700,000 bpd within one year. In 2014 alone, in fact, crude oil prices above $100/bbl in the firsthalf of the year encouraged U.S. output to increase by as much as 1.7 million bpd. In this sense, U.S.
oil output can respond fairly quickly to price changes due to the short investment cycle. Therefore, aparticipant noted that the United States could serve as a “market stabilizer”.
Lastly, we discussed oil production in the Middle East in respect to the impact of low oilprices. Saudi Arabia and Iraq are representative countries that have remarkably increased oil output
even under low oil prices from 2014 to the present. Both are major oil producers that can produce oilat low cost. Saudi Arabia has expanded production under its policy of giving priority to maintaining
or increasing its market share and is likely to keep output at or above 10 million bpd for theimmediate future, according to a dominant view given at the conference. One participant pointed outthat factors behind the high-level Saudi oil production included growing domestic oil demand andsupply for expanded domestic oil refining capacity. As for Iraq that has expanded output more thanoriginal expectations by market participants, some participants in the conference called for paying
attention to a possible further output expansion, while others forecast that output growth may cometo a pause in 2016. Iran’s oil production was taken up as the largest wild card for the future. Someparticipants noted that if Western economic sanctions on Iran were lifted, Iran could start oil exports
from inventories in tankers over a short term and expand output at Ahwaz and other oilfields thathave restricted production under the sanctions. But many others pointed out that how much Iran
could expand production was unknown. Iran’s possible oilfield development using foreign
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investment has attracted global attention. The development may depend on terms and conditions in
specific contracts to be announced in the near future. The possibility of Iranian output expanding
over a medium to long term cannot be denied. In this sense, oil market players would have to keep
close watch on Iranian moves, according to a view provided at the conference.
Generally, the environment for investment in oil supply expansion is severe under low oilprices. In non-OPEC oil producing countries, particularly, low oil prices have deteriorated theeconomics of oil production and caused investment cuts and are expected to restrict output over ashort to long term. But low oil prices’ adverse effects on production differ from country to country
depending on investment cycles and national conditions. Oil policies have great influences on oil
supply in the Middle East. It may be important to watch country-by-country developments regarding
oil production and investment.
Contact: report@tky.ieej.or.jp
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http://eneken.ieej.or.jp/en/special_bulletin.html

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