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Moody’s: Oil Industry Must Spend $542 Billion To Avoid Supply Shock

By Tsvetana Paraskova - Oct 07, 2021, 12:00 PM CDT

1. Annual upstream investment crashed by around 30 percent in 2020 and has only slightly recovered since, according to the credit rating agency
2. Global annual upstream spending needs to increase by as much as 54 percent to $542 billion if the oil market is to avert the next supply shortage shock

Global annual upstream spending needs to increase by as much as 54 percent to $542 billion if the oil market is to avert the next supply shortage shock, Moody’s said in a report on Thursday carried by Bloomberg.

Currently, oil exploration and production (E&P) companies around the world are underinvesting in supply as they continue to keep capital expenditure (capex) low after the 2020 price crash and crisis, Moody’s notes.

Annual upstream investment crashed by around 30 percent in 2020 and has only slightly recovered since, according to the credit rating agency.

Most producers continue to stick to conservative capital budgets for 2022, but slight growth can be expected as commodity prices jump, Moody’s analysts say.

Yet, “Our analysis demonstrates that upstream companies will need to increase their spending considerably for the medium term to fully replace reserves and avoid declines in future production,” Moody’s Vice President Sajjad Alam said in a statement.

This year, spending is expected at $352 billion, while medium-term annual investment has to grow to $542 billion to keep with the demand returning from the pandemic slump, according to Moody’s.

“The industry will need to spend significantly more, especially if oil and gas demand keeps climbing beyond pre-pandemic levels through 2025,” Moody’s analysts wrote in the report, as carried by Bloomberg.

Underinvestment in upstream projects is a major wild card for oil markets going forward, analysts and industry officials say.

The oil industry is “massively underinvesting” in supply to meet growing demand, which is set to return to pre-COVID levels as soon as the end of 2021 or early 2022, Greg Hill, president of U.S. oil producer Hess Corp, said last week.

Last year, global upstream investment sank to a 15-year low of $350 billion, down from around $600 billion before the pandemic, according to estimates by Wood Mackenzie from earlier this year.

By Tsvetana Paraskova for Oilprice.com