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Gas crunch looms on project deferrals, but no worries for oil: EY’s Brogan

Fears of a crude supply crunch in the coming years are overblown, as economically driven shut-ins, particularly in the US shale patch, could be reversed with relative ease, but that is not the case for gas as the spate of project deferrals could eventually lead to shortages, the head of oil and gas for consultancy EY, Andy Brogan, said in an interview with S&P Global Platts.

While gas prices were currently depressed and looked likely to remain so for the next few years due to overcapacity, overall gas demand was expected to continue rising. Eventually, demand would outpace new supply additions, given that a number of new LNG projects had been canceled or deferred due to market conditions, Brogan said.

“There’s a lot of capacity available from projects where most of the cost has already been sunk,” he said. “In the medium term, you can see that these project deferrals will begin to have an impact. But in the short term, gas kind of looks stuck where it is.”

Oil demand, however, was likely to remain impaired for a while as the global economy recovered from the coronavirus pandemic. Between lower demand and OPEC+ production cuts, there remained ample spare capacity to supply the market’s foreseeable needs, Brogan said.

Should demand fully rebound and new production be needed, wells could easily be reactivated or drilled in fields where production had been reined in, whether due to OPEC+ cuts or economic factors, such as in the US and Canada.

“There are substantial resources available that can be converted into reserves and produced if the price signal sort of points in that direction,” Brogan said. “Now you could say that’s always been the case. But I think now those resources can be converted into reserves and produced in a six-month time frame, not a five-year time frame.”
Quick oil ramp-up

The International Energy Agency in May warned that the coronavirus crisis was causing a “staggering” $400 billion decline in energy investment in 2020, with oil and gas investment falling by a third.

IEA Executive Director Fatih Birol said the investment gap would result in “lost energy supply that we might well need tomorrow once the economy recovers.”

Brogan, however, said that at least in oil, upstream investment wasn’t as urgently needed. He compared the oil industry to coal, with its plentiful reserves that are easy to access.

“I think the oil market in a way now looks more like the coal market in terms of you not really talking about having to find and develop and then produce,” he said. “We know where it is. We know how much it will cost to get it out of the ground. If supply isn’t sufficient from other places, then people can relatively quickly ramp up.”

US shale production, in particular, had proven to be nimble and able to react quickly to price changes. Brogan said he expected some consolidation in the US shale sector as financially weaker players were bought out, putting the industry on a more fiscally sustainable path.

“If you look at the overall cycle of existing asset declines, scheduled replacements and the buffer from being able to drill unconventionals quickly, then the chances of ending up in a structural supply shortage before you sort of start to see a material impact from the energy transition, I think it now should be considered to be quite low,” Brogan said.
Source: Platts

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