A shrinking oil market in the SDS would change the supply landscape dramatically…

mb/d

70

60

50

40

Oil production by region, type and scenario

OPEC

Unconventional

Offshore

Onshore

Non-OPEC

Unconventional

Offshore

Onshore

Oil demand in the SDS is falling by around 2.5% per year by the 2030s. However, even this rapid drop would be well short of the decline in production that would occur if all capital investment in currently producing fields were to cease immediately. This would lead to a loss of over 8% of supply each year. If investment were to continue in currently producing fields but no new fields were developed, then the average annual loss of supply would be around 4.5%.

Under these circumstances, as examined in more detail in Section III, continued investment in existing oil fields, as well as some new ones, remains a necessary part of the energy transitions envisaged in the SDS. What is much less clear is who would be making these investments, and where.

The answer to this question would be determined in large part by the approaches pursued by resource-holding governments and companies.

The strategies of the main, low-cost resource holders, notably those in the Middle East, are critical in this regard. In theory, given their place at the lower end of the supply cost curve, these countries would be in a position to satisfy a larger share of oil demand in such a scenario, with knock-on effects on price levels (a possibility examined in a sensitivity case at the end of this section).

In practice, the options open to these large producers would depend on their resilience to lower oil prices, i.e. the success or otherwise of efforts to diversify their economies and reduce reliance on hydrocarbon revenues. In the absence of concerted reforms, any attempt to maximise production and increase market share would bring down oil prices to levels that would cause profound fiscal difficulties, meaning that prices at these low levels could not in practice be maintained for long (as discussed in more detail below).

Policies in other countries would also play a role, notably if any governments decided either to restrict access to their resources (“keep them in the ground”) or, alternatively, to incentivise their development by introducing more favourable fiscal terms.

Company strategies would also be influential in determining the kinds of investments that went ahead, as certain types of resources – offering lighter oil, or faster payback – might offer a balance of risk and reward that is better suited to this kind of scenario.

In the very challenging market conditions of the SDS, this report assumes that – either by design or by default – investment and production in major low-cost resource holders is limited in a way that maintains a floor under oil prices.

This allows some higher-cost non-OPEC supplies to find a place in the supply mix. It also means that tight oil production in the United States continues to grow into the 2020s; the short investment cycle of shale is also relatively well suited to the uncertainties of this Scenario.

However, even with a larger share of shorter-cycle investments that are more reactive to prevailing market conditions, oil markets could well be in for a bumpy ride as and when energy transitions accelerate. There would be a greater number of factors with larger levels of uncertainty affecting the supply-demand balance: for this reason, the oil price in the SDS could well be more volatile.

mb/d

50

40

30

20

Refining capacity at risk by region and scenario

100% Rest of world