Oil and gas discoveries are at the lowest level since 1946

Oil and gas firms are having their worst year for new fossil fuel discoveries in decades and reserves are dwindling. The oil and gas industry is on track to discover just 4.7 billion barrels of oil equivalent (boe) by the end of 2021, its worst performance in 75 years, according to the research firm Rystad Energy.

Historically, large discoveries have accounted for most of the world’s new reserves. Globally, 40% of all petroleum ever discovered has been found in 900 oil and gas fields. But the industry has made few such discoveries this year. The ratio of proven reserves to production, a measure of how much extractable oil remains in the ground relative to annual production, is now at its lowest level since 2011.

Production of existing wells naturally declines each year, so the industry must constantly open up new fields to keep pace with demand. The International Energy Agency estimates global oil production declines by about 7% per year without investment in existing fields.

Yet cash to reinvest in new supply is scarce. Since the mid-2010s, US oil and gas firms have slashed capital expenditures as their stock prices plummeted. During the pandemic, firms cut exploration budgets even more to trim debt, pay dividends, and stem huge losses from a US fracking boom that failed to generate profits. “The industry was in a survival mode throughout 2020, reducing its capital expenditures to match with low cash flows through the 2020 covid-19 recession,” according to the American Petroleum Institute (API).

In 2020, industry investment dropped by $145 billion, leaving it at about half the level it was in 2014. It remained at a similar level into 2021. The OPEC+ bloc of oil-producing nations has also proven unusually disciplined at curtailing production.

This dwindling supply is colliding with rising demand, pushing up prices. The next two years could require nearly all of the world’s spare oil production capacity as demand rises above pre-pandemic levels, according to API.

Most of the potential dollars for exploration and carbon-free energy technologies are going to shareholders. Oil and gas firms are paying dividends roughly three times the average of S&P 500 companies. “The companies are being run to generate free cash more than growth,” says Peter McNally at the financial research firm Third Bridge.

It’s not clear new oil and gas exploration will deliver the typical returns given the global push to stem climate change by decarbonizing the economy. The International Energy Agency told governments this May that all investment in new oil and gas fields must stop in 2021 if the world is serious about reaching net zero emissions by 2050.