An OPEC Academy lecture featuring S&P Global Chief Strategist and Vice-President, Bob Fryklund, provides an in-depth look at the risks of focusing on proven fields rather than frontier exploration.
Global oil producers will need to step up efforts to harvest the world’s vast proven but undeveloped oil resources to ensure future energy security, one of the industry’s leading upstream analysts said in a presentation to the OPEC Academy. Following years of decline in tapping discoveries, many producers have sought to maximize production through existing fields. This has occurred as the industry faces mounting challenges related to investment, the energy transition and shifting market trends. Bob Fryklund, Chief Upstream Strategist and Vice-President of S&P Global Commodity Insights, touched on these issues during an OPEC Academy presentation on May 6, 2022, entitled: ‘Resource conversion: A key to the future of crude oil supply’.
The event was the latest in the Academy’s lecture series that draws on some of the industry’s foremost oil and energy market and technology experts. The OPEC 67 Academy, headed by Dr Ayed S Al-Qahtani, Director of the Research Division, supports knowledge sharing within the OPEC Secretariat and Organization.
Fryklund noted that exploration has continued to grow even as the COVID-19 pandemic hammered demand. Over the past two decades, he said, annual liquids discoveries have averaged eight to ten billion barrels.
Despite this “relatively steady” exploration success, Fryklund pointed out that harvesting proven but undeveloped oil supplies has been in steady decline since 2000. Between 2000 and 2007, on average 56 per cent of discovered oil fields were then converted into production.
In the ensuing seven years, that dropped to around 35 per cent. After 2014, the amount of resources going online “fell off the cliff”, said Fryklund.
From 2015 onwards, “on average, only nine per cent of the resources that have been discovered are getting online,” he told a rapt audience at the OPEC Secretariat and others joining by video link, adding that for natural gas “it is even worse” — less than six per cent. “This is critical. And probably one of the most important things I will talk to you about today is resource conversion — we are not doing a good job.”
“There has been a lot of harvesting from existing fields over the years, but look at what is happening as we look at future years,” he said, pointing to graphics highlighting the shift. “From about 2010 forward, there has been a big switch — we have harvested mostly from existing fields for our barrels.”
The sharp decline starting in 2015 coincided with the severe market downturn that would pave the way for the signing of ‘Declaration of Cooperation’ (DoC) on December 10, 2016, and its history-making efforts to restore oil market stability and sustainability. Those efforts gained further traction after the unprecedented market slump triggered by widespread COVID-19 containment efforts, particularly in the first half of 2020.
New production potential
Turning to future growth, the S&P strategist highlighted the importance of converting discovered but undeveloped resources into barrels of oil. In fact, this category “is the big bogeyman”, he noted, amounting to a “very significant” amount of close to 20 million barrels per day (m b/d).
Raising the question of how much of the “discovered but undeveloped oil will ever be developed,” Fryklund said: “If you think around the world of different fields and different projects — which ones should not really be categorized as ‘discovered undeveloped’ as part of the supply curve, but really ought to be moved over into ‘contingent’ — there are a lot of barrels in that bucket. One extreme example is up in Alaska. There was a discovery there that was touted as one billion barrels — it will never be developed, but it is carried as ‘discovered and undeveloped’.”
Field growth is not insignificant, however. In fact, production from exiting fields resulted in around 530bn b of liquids, he noted. “It is a massive amount when we look at what has been added between 2000 and 2020,” Fryklund said. “That’s pretty remarkable and is almost two and half times the amount we’ve added through exploration.”
But looking ahead, regions like the Middle East and the Commonwealth of Independent States (CIS) may need to focus more on exploration to harvest additional barrels. “There has been almost no exploration in the CIS or Middle East” in the past decade, he noted.
Saudi Arabia and the United Arab Emirates (UAE), along with DoC participants like Bahrain and Oman, are exceptions. Fryklund noted that “a new wave of exploration is taking place,” with Saudi Arabia and the UAE “in particular looking beyond conventionals.” Over the past 20 years, conventional North America has been the global leader in expanding resource growth through exploration, at 71 per cent, followed by Africa at 58 per cent. Exploration in many OPEC Member Countries has slowed compared to non-OPEC producing nations, Fryklund said. In fact, growth in many OPEC Member Countries along with producers in the CIS has largely come from existing fields.
Citing Iraq as one example, he sees significant resources available in the Western Desert. “There is lots of exploration potential, but it is still at the back of the bus as far as an investment goes because of the harvesting and conversion of existing fields,” Fryklund explained.
Uncertainty about Russian output
Responding to a question during the OPEC Academy discussion, Fryklund stressed the need to take a closer look at basins where there has not been major exploration in decades. Anxiety about the security of energy supplies in the current geopolitical environment could prod producers to seek new resources in these basins. For instance, “there is a lot of undiscovered and undeveloped gas in Algeria and Libya and a lot of it throughout North Africa,” Fryklund added.
Russia remains a wild card given the sanctions on its energy sector and uncertainties about its future production. “We have indications from COVID-19 of how much production they can drop and then recover, and this will be another test of that,” Fryklund said. “Right now they are about a million barrels below their peak, but if they go as much as two or three, that should be an interesting challenge to think about,” he added. “As we all know, it is difficult to get some of these old fields back up and running once you shut them in.”
From wildcats to a new dynamic
Fryklund also noted that a structural change in global market dynamics is taking place. This can be traced partly to 2009 and 2010 when big oil companies began to watch their traditional double-digit rates of return sink into single digits. Investors pushed producers to do more with what they had and to shorten the timeline between exploration and actual production, with offshore Guyana an example of the latter.
“Companies and investors started losing confidence in the exploration side and it became more of a harvesting business,” the S&P senior analyst said. “Since then, despite the ups and downs of oil, the market has also been shrinking over time. That has happened at the same time as the discussion on the energy transition, and that energy transition discussion is pushing this concept of an industry that is shrinking forever.” The industry structure has changed along with these perceptions, he added, pointing out that European firms have begun to invest heavily in more diversified energy portfolios, including power generation through renewables. Producers in other regions remain focused on traditional markets and decarbonizing their operations.
Advantaged basins
In this respect, there are many opportunities for OPEC Member Countries and their National Oil Companies (NOCs). In discussing what he called ‘advantaged basins’, Fryklund noted that many OPEC NOCs enjoy relatively low-cost production, high crude quality and are close to growth markets of the future. These will be important as investors — as well as consumers — demand more from producers. Pointing to the example of the Rovuma Basin gas development project offshore Mozambique, Fryklund said: “In more than ten years we don’t have one dollar coming out of there, we don’t have one molecule coming out of there. That is not going to be tolerated going forward. Those kinds of projects will not be advantaged and may get left behind as we transition because there are things that are much easier to put online.” Being close to consumers is also going to be increasingly important. “This is why some of your Member Countries have built refineries and petrochemical plants in Asia so they can get those molecules to where they are consumed,” Fryklund said.
“There has been a flip where consumers are driving the market rather than producers. So access is an advantage.” A further plus for OPEC Member Countries is that they are located in what Fryklund called ‘super basins’, or areas with major renewable potential on top of their advantaged hydrocarbons. Drawing the strengths of both can be beneficial to these producers. For instance, replacing oil or gas currently used in the production process or in electricity generation with solar, wind or other renewables could lead to improvements in efficiency, lower operational costs and reduce the industry’s environmental footprint. All are pluses in terms of global competition. Harnessing technologies such as carbon capture and storage and using rather than flaring methane could also free up barrels of oil for export, the analyst explained.
“Why should we drill for a barrel when quite frankly all we need to stop consuming that as heating oil or for electricity generation and replace it renewables so the barrel can be sold,” Fryklund said in his presentation.
“That’s our cheapest barrel.” Fryklund foresees more alliances between NOCs and their international counterparts to harness the complementary power of hydrocarbons and renewables. In his response to one question, Fryklund cautioned that there is a continued need for oil and oil exploration and that the energy transition is not a clear-cut solution to the energy future. Oil companies that scale back their investment in traditional resources to focus on renewable risk substantially reducing their rates of return, he noted, creating conflicts with investors, as well as growth potential. Fryklund also stressed that the transition is not without risks. Incidents like the Texas ‘ice age’ in February 2021 — when extreme winter weather overwhelmed the state’s renewables-dependent power grid — and Europe’s efforts to wean itself off Russian oil and gas are a “wake-up call” when it comes to the transition. Such incidents show that “hydrocarbons are going to get funded,” he said, “but only those that can demonstrate that they are advantaged.”
‘A dear friend of the Academy’
Fryklund’s presentation and the discussion that followed marked the first time an OPEC Academy guest speaker has appeared at the Secretariat since the first COVID-19 containment efforts were introduced in March 2020. Fryklund is “a dear friend of the OPEC Academy,”
Dr. Al-Qahtani said in welcoming the S&P chief strategist. Participants attended the 90-minute event both in person at the OPEC Secretariat and by video link. Al-Qahtani noted that Fryklund’s presentation touched on very relevant issues related to future oil production, investment and global climate policy. “It is comforting to see [from the presentation] that oil will be with us for the foreseeable future,” the OPEC Research Director said. But he added: “Oil producing countries and companies are torn between many very significant forces, be it climate and the climate change agenda on the one hand, and cost of things on the other.”
Culled from OPEC Bulletin