Andrew Latham, Vice President, Energy Research, Wood Mackenzie

Why peak advantage is the defining upstream challenge of our time

The world is not going to run out of oil or gas anytime soon. Total discovered and prospective oil and gas resources are more than double likely demand to 2050. The upstream industry is able to prioritise advantaged barrels to produce lower-cost, lower-carbon options. Meanwhile, much of the world's vast stock of disadvantaged resources can happily stay in the ground. Over two-thirds of commercial undeveloped resource is at risk of never being developed.

Such apparent bounty creates the impression that the industry can relax. Far from it. Truly advantaged resources, with low breakeven (resilience to low prices) and emissions (sustainability in scope 1 and 2 terms) are anything but plentiful. As things stand, we see enough to satisfy only about half of our base-case oil and gas demand forecast to 2050. Even our much lower accelerated energy transition (AET-1.5) demand scenario – which lays out what is needed to achieve the most ambitious targets of the Paris Agreement, keeping emissions within 1.5 °C of pre-industrial levels and reaching global net zero by 2050 – will require some disadvantaged supply.

This problem of ‘peak advantage’ looms ever larger and presents a huge and urgent call to action. As recent supply interruptions serve to remind us, we neglect the upstream at our peril. Both oil and, in particular, gas will continue to need huge and sustained investment.

Upstream companies must act now. We see three main investment themes to mitigate this coming shortage of advantaged resources: 

1. Portfolio renewal. New fields are generally more advantaged than old. They enjoy high utilisation of facilities and modern decarbonisation technologies. Exploration is one relatively small, but valuable source of new fields, and high-impact wildcatting may persist for far longer than is widely believed.
2. Decarbonisation of existing assets. Technologies such as facilities electrification and methane escape abatement can improve the emissions of older assets without raising costs too much. 
3. Low-carbon alternatives. Companies can invest to cut oil and gas demand by growing their green energy businesses, including biofuels. 

Even together, these three remedies will not be enough to fix the whole upstream industry. Its outlook becomes steadily more challenging as environmental, social and governance (ESG) pressures increase while inventory inexorably matures. We expect a widening diversity of upstream strategies as companies choose between flight or fight.

Those contemplating a retreat from upstream may view peak advantage as a validation of speedier withdrawal. That would leave more opportunity for others opting to double down on the sector.

Most of those sticking with upstream will strive to prop up their portfolio quality as they deplete inventory. Competition will surely intensify as companies scramble for a dwindling pool of advantaged assets. There are simply not enough for everyone to maintain current performance, let alone improve it.

In and of itself, peak advantage will do little to accelerate the wider energy transition. It might support higher prices but will otherwise not substantially erode oil or gas demand. Peak advantage is a problem that increases the costs and emissions of the industry without making it much smaller.

Are global oil and gas resources truly abundant?

If we are indifferent to resource quality, we have plenty of oil and gas to go around.

For oil, we estimate total discovered and prospective resources at more than 2 trillion barrels. That is double our base-case energy transition outlook (ETO) cumulative oil demand forecast to 2050. It is triple oil demand to 2050 under our AET-1.5 scenario.

For gas, it is a similar story. We estimate total discovered and prospective gas resources at 1.7 trillion barrels of oil equivalent, close to double ETO gas demand to 2050.

These estimates of resource surplus are before the inevitable upward creep of volumes in many assets that we expect from appraisal success and improved recovery. With so many options, plenty of the world’s discovered resources will never be produced. Many of its prospects will never be explored.

Never mind the quantity, where is the quality?

Unsurprisingly, hardly anyone talks about peak oil supply anymore. An industry that once fretted that it would run out of oil has flipped to worrying that it might have to leave much of its resource in the ground.

It was the emergence of tight oil more than a decade ago that did most to ease those supply concerns. Here, it seemed, was an almost limitless new resource to fix the problem over the medium term. Then oil markets increasingly reckoned that the energy transition would erode much of long-term demand anyway.

But has the oil and gas industry really secured long-term supply? Not if tight oil is the only new remedy. We now know much more about the likely scale of global tight oil. Production has grown to around 10 million barrels of oil a day from reserves of around 150 billion barrels. Such reserves equate to four years of global oil demand. If peak oil supply was ever a problem, then tight oil has only delayed any such shortfall by a few years.

The peak oil narrative of yesteryear worried about the wrong problem. Abundant resources meant we were never in danger of running out of oil (or gas) in the foreseeable future. But we do have an issue with the affordability (defined by low costs and breakeven) and emissions (defined by low scope 1 and 2) of known resources. 

Forget peak oil supply. ‘Peak advantage’ is set to become the defining challenge for the upstream industry over the coming decades.

Known fields alone cannot meet oil and gas demand to 2050 

The world is far from the end of the hydrocarbon era. Under our base-case ETO forecast, oil demand peaks in the 2030s before declining slowly to 94 million barrels a day in 2050. 

This demand forecast and investment horizon outlook present a huge call to action, requiring a very active national oil company (NOC) and international oil company (IOC) upstream industry over the next three decades. Supply from existing proven developed fields will dwindle to just 10 million b/d by 2050 without future capital investment (left-hand chart below). 

‘Most likely’ oil supply from all known onstream and undeveloped commercial fields will still only be 40 million b/d in 2050 (right-hand chart below). Many of these fields are outside the energy super basins that have ready access to decarbonising factors that best enable advantaged supply.

Oil demand under our AET-1.5 scenario is some 20 million b/d lower than that of our ETO by 2035 but will still be 33 million b/d by 2050. Responsible companies hoping for this much better climate outcome face a difficult planning challenge given the wide difference in demand scenarios.

The picture is similar for gas. Under our ETO scenario, gas demand will be 88 million boe/d in 2050, some 12% higher than today. Under our AET-1.5 scenario, gas demand in 2050 will fall to 59 million boe/d.

Either forecast or scenario will require huge and sustained upstream gas investment. Proven developed gas supply, assuming no future capital investment in existing or new fields, will be only 7 million boe/d by 2050. 

‘Most likely’ gas supply from all known onstream and undeveloped commercial fields will be just 29 million boe/d in 2050, much of it from outside the energy super basins. 

The hunt for advantage looks unpromising

Meeting the demand gap beyond proven supply from known fields (developed and undeveloped) depends on a mix of improved recovery from producing fields and unproven new fields. Neither category looks particularly advantaged.

First, the upside in producing fields. Improved recovery from onstream fields is insufficient to satisfy all future oil or gas demand. In any case, chasing the harder-to-recover barrels from these fields is unlikely to cut either costs or emissions. There are often good reasons why such barrels were not developed in the first place. Many secondary and tertiary recovery technologies are high cost and high carbon. Recovery per well (EUR) is typically far lower for infill drilling. Mid- to late-life brownfield investments can greatly extend field lives. That entails many additional years of less-than-optimal facilities utilisation, with consequently higher emissions intensity. 

Second, the development of new fields. Clearly, the industry is going to need huge numbers of new fields. Unfortunately, much of the current inventory of discovered undeveloped resource is not very advantaged either. That is because the best opportunities of this kind tend to be quickly brought onstream and what’s left is often compromised:

• Only 28% of the resources in commercial undeveloped fields (49 billion boe) are advantaged in terms of breakeven below US$30 Brent with emissions intensity of less than 20 kgCO2e/boe. That leaves 72% of this resource at risk of missing the cost and emissions thresholds of the modern upstream industry.
• Some of these undeveloped fields can be improved. Low-cost but high-emissions barrels account for 10% of commercial undeveloped fields (17 billion boe). These offer opportunities to add advantage through investment in decarbonisation, provided incremental costs are not too high. New technologies, such as facilities electrification and methane emission abatement, can cut emissions without raising breakeven too much.
• Others look doomed to remain undeveloped, however. Low-emissions but high-cost barrels, which account for 38% of commercial undeveloped fields (66 billion boe), are unlikely to achieve advantage. Structurally higher cost is a much harder problem to fix, though these barrels could move up the pecking order under a very high carbon-price scenario. 
• Worse still are the resources with both high emissions and high costs. About 24% of commercial undeveloped fields (42 billion boe) fall into this disadvantaged category, with little realistic hope of development.

Where else could advantaged resources come from?

Exploration and biofuels can help. The shortage of advantaged resources within brownfields and improved recovery has put the spotlight on prospective (yet-to-find) resources. Exploration’s recent track record of value creation suggests that it will continue to play a role. But the scale of advantaged resources added in new discoveries will be nowhere near enough to fully address peak advantage.

The industry discovered 228 billion boe in new conventional discoveries between 2012 and 2021. Some 75 billion boe are within commercial fields. These are generally accretive for emissions, with an average emissions intensity of 16 kgCO  e/boe versus the current global average of 23 kgCO  e/boe (19 kgCO  e/boe for undeveloped fields). The costs of these discoveries are also generally good, with a weighted average NPV10 breakeven in Brent price terms of just US$33/bbl.

We expect high-impact exploration to be an important source of new resource for as long as demand remains along or near our ETO trajectory. Wildcatting is unlikely to wind down much before 2050 under this scenario.

Recent results suggest a contribution of around 5-10 billion boe of new advantaged barrels a year. Most will be found within energy super basins. Exploration on this scale over the next two decades will add oil and gas supply of around 10-15 million boe a day by 2050.

Biofuels could play a greater role than exploration. Bio-based diesel and aviation fuels from plant-based feedstock could emit 80% less carbon than the crude oil-based products that dominate today’s oil market. We see up to 20 million barrels a day being possible by 2050. For gas, biomethane could play a growing role in future supply.

Life in the upstream will become harder

The relentless harvesting of advantaged resources leaves ever fewer attractive options remaining. Historically, this situation was largely resolved by full resource replacement from a vibrant exploration sector. But the industry’s capacity for exploration has been permanently reduced, with investment down by more than 70% in a decade. There can be no return to the widespread wildcatting seen before.

The implications of peak advantage are profound and varied:

• Life will become steadily more difficult for responsible operators that care about cutting emissions. That includes almost the entire industry given the widespread emphasis on 
• ESG factors.
• Competition for the dwindling pool of advantaged opportunities, including high-impact exploration, will surely intensify.
• Industry-leading cost and emissions targets will become steadily harder to achieve. 
• For example, TotalEnergies requires new upstream investments to break even below US$30/barrel and emit less than its current portfolio intensity of 20 kgCO  e/boe. 
• Equinor requires its overall emissions intensity to be less than 10 kgCO  e/boe.
• The decarbonisation of low-cost but high-emissions resources must become a growing investment theme. New technologies could become the game-changers here. But an equivalent theme of investment in currently unaffordable low-emissions resources is unlikely, as high costs are hard to improve through investment.
• Peak advantage threatens to raise the long-term emissions intensity of the upstream industry. And because it barely erodes demand, peak advantage brings precious little upside from a climate perspective:
• Direct implications for oil and gas demand are modest. Perhaps full consideration of scope 1 and 2 emissions in supply cost curves and price modelling would point to higher costs. These might nudge prices upwards, but any demand impact would probably be marginal.
• Higher emissions intensity increases ESG headaches for producers and consumers alike. 
• Upstream companies can also work on alternatives to reduce oil and gas demand. Their most effective demand lever is to boost investment in low-carbon energies, including biofuels.

Conclusion: Upstream strategies will diversify

In future decades, the industry is unlikely to fully satisfy ETO oil and gas demand with advantaged resources. There are simply not enough advantaged resources for everyone to maintain, let alone improve, current cost and emissions performance.

The sector’s challenging outlook presents companies with a classic choice of flight or fight: 

• Flight: Companies that are already beginning to retreat from the upstream sector to low-carbon energies will feel vindicated in their choice. Perhaps some will accelerate their withdrawal. As some of the European Majors and others pull back, overall upstream investment may fall. Security of supply may suffer.
• Fight: Other companies will be less squeamish about the upstream and will double down. The US Majors and most NOCs seem to be in for the longer haul. This group will hope for fewer competitors in the sector. Perhaps a few counter-cyclical investors, recognising the need for secure, affordable supply with low emissions, will increase support for niche players specialising in exploration for advantaged resources. 

Among those that choose to stay, peak advantage is likely to widen the diversity of upstream strategies. 

Some companies could decide to write off disadvantaged assets within their portfolios. Inevitably, parts of the industry will have to tolerate some disadvantaged production to meet expected demand. Unfortunately, we may even see the emergence of specialist ‘dirty’ oil and gas companies operating the most disadvantaged assets shunned by others. All the more reason for the responsible upstream industry to boost its investment in renewal, decarbonisation and low-carbon alternatives.

Original article   l   KeyFacts Energy Industry Directory: Wood Mackenzie