ARE we heading into a supply crunch? While everyone remains concerned about the demand peak, and rightly so, the ongoing supply glut and low crude prices along with the decline in appetite to invest in the sector could cause supply crunch in the near future, some are asserting.

The Covid-19 pandemic is having widespread and often dramatic effects on investments in the energy sector, the International Agency (IEA) is reporting in the just-unveiled, fifth edition of its World Energy Investment (WEI) 2020.

At the start of the year, `our tracking of company announcements and investmentrelated policies suggested that worldwide capital expenditures on energy might edge higher by 2 per cent in 2020,` the global energy watchdog added. This would have been the highest uptick in global energy investment since 2014.

However, the pandemic has upended these expectations, and 2020 is now set to see the largest decline in energy investment on record, a reduction of one-fifth or almost $400 billion in capital spending compared with 2019.

In its 2018 New Policies Scenario, the IEA had projected oil supply to drop by over 45 million barrels per day (bpd), if no capital investment into existing or new fields were made between 2017 and 2025.

The report underlined then, that even if investments continued into existing fields, but with no new fields brought online the `observed decline` would still lead to a decline of close to 27.5m bpd over the period.

This meant that even if one assumed global oil demand would fall by 10m bpd in the post-pandemic, that would still leave a supply-demand gap of 17.5m bpd, writes Alex Kimani in his piece in Oilprice.com. And in the wake of Capex restraints, that could be on the cards, the WEI-2020 now underlines.

The downward trend in Capex is not only impacting the conventional crude, it is also beginning to sharply lower the US shale output. In an earlier IEA report, US shale was slated to bridge about a third of the supply-demand gap by providing 11m bpd of tight crude oil, tight condensates, and tight NGLs. That is now under clouds.The sector has already announced 30 replace Capex cuts and could see production f all by 2m bpd in 2020.

The shale fracklog has already started depleting af ter falling 10 replace last year, the first drop since 2016. With a huge wave of well shut-ins still going on, US shale could permanently lose 10 replace of production in existing wells even after they are re-opened, Kimani writes in his piece.

Since 2014, as per the IEA, the global annual average level of investments into new conventional crude oil projects has been closer to 8bn barrels, or about half of what is required to fully meet global demand by 2025. IEA had also estimated that US tight liquids production would need to grow an additional 6m bpd by 2025, to meet the resource shortfall.

The oil price crash of recent weeks has triggered a wave of huge E&P Capex cuts.

Rystad Energy says the global capital expenditure is likely to fall by $100bn this year to around $450bn, a 13-year low, while the US shale producers are set to lower Capex by 30 replace. Global E&P Capex spending in 2019 clocked in at an estimated $546bn, well below the $880bn recorded in 2014 during the last oil price boom. The latest spending cuts have set back the clock a good 13 years, underlines Kimani. Roughly 60 replace of the world`s oil comes from just 25 oil fields mainly in Saudi Arabia and the Middle East with an average age of over 70 years and already experiencing six to seven replace annual declines.

A recent note from Alerian, an independentprovider of energyinfrastructure and MLP market intelligence says on an average, Capex has been reduced nearly 30pc against initial guidance, and more than 45pc versus 2019.

Renewable power projects are also beginning to feel the heat. It is expected to fall by around 10pc for the year, says the WEI-2020. Capacity additions are set to be lower than 2019 as project completions get pushed back into 2021. Final investment decisions (FIDs) for new utility-scale wind and solar projects slowed in the first quarter of 2020 and are now back to 20171evels.

Distributed solar investments have also been more dramatically hit by lower consumer spending and lockdowns.

The overall maths is getting interesting and complicated.