Some US$380 billion worth of upstream oil and gas projects have been put on hold as a result of the fall in oil prices, according to new research by analysts Wood Mackenzie.
The Edinburgh based firm says the last six months of 2015 saw some 22 major projects deferred - amounting to 7 billion boe of commercial reserves put on hold.
This is on top of 46 developments containing 20 billion boe of reserves already previously deferred, according to its research.
Deepwater developments have been hit the hardest, according to Wood Mackenzie, accounting for more than half of new project deferrals up from 17 to 29, or 62% of total reserves and 56% of total capex.
The average break-even of delayed greenfield projects is $62/boe, says the firm.
The impact of the deferrals is some 2.9 MMb/d of liquids production deferred to early next decade, up from 2 MMb/d when Wood Mackenzie last looked at project deferrals in July 2015. Deferred liquid volumes are up 44%, compared to gas at 24%.
“One reason we are seeing a growing list of delayed projects is cost deflation – or to be more accurate the need for costs to fall more to stimulate investment,” Angus Rodger, Principal Analyst, says. And the analysis shows that this is where deepwater has made the least gains: “The biggest jump in pre-FID delayed projects over the last six months was in the deepwater, rising from 17 to 29, where costs have only fallen by around 10% despite the global crash in rig day-rates. Despite the size of these fields, the combination of insufficient cost deflation and significant upfront capital spend has discouraged companies from greenfield investment in the sector.”
Rodger says 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.
"Tumbling prices and reduced budgets have forced companies to review and delay final investment decisions (FID) on planned projects, to re-consider the most cost-effective path to commerciality and free-up the capital just to survive at low prices.”
Tom Ellacott, Vice President of Corporate Analysis for Wood Mackenzie points out that since Wood Mackenzie last ran this analysis a key change for companies is stricter investment criteria.
“Companies are having to adjust investment strategies to the risk of sustained low prices and this means tougher screening criteria for pre-FID projects. We believe that most companies will now be looking for these developments to hit economic hurdle rates at around $60/bbl. Tougher capital allocation criteria will give companies the framework to make difficult decisions about restructuring portfolios, optimizing pre-FID projects and capturing the full benefits of cost deflation. If a sector or country cannot meet new investment thresholds and compete for capital, operators are now more likely to choose divestment over warehousing a stranded resource.”
The report’s findings conclude that FIDs on many of these projects have been pushed back to 2017 or beyond, with first production currently targeted between 2020 and 2023.
"But against a backdrop of overwhelming corporate pressure to free-up capital and reduce future spend - to the detriment of production growth - there is considerable scope for this wall of output to get pushed back further if prices do not recover and/or costs do not fall enough," says the firm.
Countries worst affected, i.e. with the largest inventory of delayed oil projects, are Canada, Angola, Kazakhstan, Nigeria, Norway and the US, which hold nearly 90% of all deferred liquids reserves.
The year ahead offers some glimmers of hope, however, not least in terms of innovation and genuine moves to standardization, says Tom Ellacot, Vice President corporate analysis. "With oil prices recently falling to their lowest level since 2004, oil and gas companies will be forced to go into survival mode in 2016. Further project delays and cuts to discretionary investment are highly likely," he says.
"That said, companies are being forced to re-evaluate how they can profitably develop large, high-cost conventional resources at low prices. Not only are we seeing a genuine push towards standardization, but low prices will also promote a level of innovation so far only seen in US tight oil.
"The pace of capex and opex deflation may therefore surprise on the upside in 2016. Finally, we expect oil prices to start recovering during the second half of the year, which should encourage first-movers to kick-start investment and lock-in gains from cost deflation ahead of the herd.”
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