Multinational oil companies have cancelled $380 billion of capital investment in exploring for new reserves, with deepwater fields – such as the North Sea – being the worst affected.
Crude oil prices have fallen by 70% since April 2014 to just over $30 per barrel, while the average break-even cost for delayed new projects was $62-barrel.
This is the summary of the latest note by the Edinburgh-based Wood MacKenzie specialist oil market-intelligence agency, which added that deepwater projects had been hit hardest.
Angus Rodger, WoodMac’s principal upstream analyst, said: “The impact of lower oil prices on company plans has been brutal. What began in late-2014 as a haircut to discretionary spend on exploration and pre-development projects has become a full surgical operation to cut out all non-essential operational and capital expenditure.
“Since the oil price collapse in 2014, we have been tracking deferred upstream projects. Our tally now sits at 68 major projects, containing 27 billion boe.
“This equates to US$380 billion of capex deferred by total project spend in real terms. As oil prices continue to fall and capital allocation tightens, we expect the list will grow further.
“The level of production impacted by these deferrals is material in a global context. In June we estimated the delayed projects accounted for around 1 million b/d of liquids output by 2021, rising to just under 2 million b/d by 2025. With more deepwater oil projects getting pushed back, the impact six months later is significantly greater – by 2021 volumes are at 1.5 million barrels per day (b/d), rising sharply to 2.9 million b/d by 2025.
“Final investment decisions (FIDs) on many of these projects have been pushed back to 2017 or beyond. Against the backdrop of overwhelming corporate pressure to free-up capital and reduce future spend, investment/output will be pushed back further if prices do not recover.
Deepwater drilling is hit the hardest
“Over the next five years, $170 billion of potential investment currently hangs in the balance, across these 68 projects.
This is disproportionately weighted towards deepwater projects where half of new projects have been deferred, up from 17 to 29. Deepwater has suffered due to the combination of insufficient cost deflation and significant upfront capital spend discouraging companies from greenfield investment in the sector.
“Deepwater is not being disregarded as an investment theme. A trend is evolving in which companies are taking more time to re-work development solutions and the industry is beginning to agree there is considerable scope for standardisation. Such structural changes take time to develop and implement, but the need to improve deepwater development economics is strong.
“2016 has just begun but industry sentiment is at a low. Although the possibility of an imminent wave of new FIDs is slim, the adverse market conditions could have a longer term positive impact.”
The silver lining in this cloud is that the crude oil price slump could trigger innovation and collaboration as companies scrabble to cut costs.
The report concludes: “Companies are being forced to find new ways to develop large, high-cost conventional resources. This will encourage a renewed focus on standardisation and innovation”.