Crude at $50 threatens $1.5 trillion in oil, gas projects
DESPITE efforts to cut costs, the petroleum industry can’t make money on $1.5 trillion in pending investments on conventional and North American shale drilling projects with $50 oil, Wood Mackenzie estimates.
In a new report released late Sunday, the energy research firm said even though oil producers are aiming to squeeze out 20 to 30 percent of their project costs through discounts on equipment and oil field services, costs will likely come down by about 10 to 15 percent, on average.
Oil companies have invested $220 billion less than Wood Mackenzie had initially estimated for this year and next year, with 46 projects deferred after the oil-market crash since the summer of 2014.
The estimated $1.5 trillion in oil projects represent prospects that drillers haven’t yet sanctioned for investments. With oil at $50 a barrel, “this spend is very much at risk,” said James Webb, Wood Mackenzie upstream research manager, in a written statement.
“A prolonged period of low oil prices over a number of years is likely needed to bring about profound, structural changes to industry costs,” Webb said.
But Wood Mackenzie believes prices will start a recovery in 2017, likely pushing costs toward levels before the oil price slump.
In the United States and Canada, oil producers have idled 1,284 drilling rigs since this time last year, according to Baker Hughes. The International Energy Agency estimates U.S. shale oil production will decline by 400,000 barrels a day next year.
The Federal Reserve noted in June that U.S. oil companies have gotten a break on oil field service prices by 20 to 30 percent, according to company surveys.
But Wood Mackenzie believes only six new projects will be approved this year and 10 next year. Oil companies will have to redraw field development plans and redesign projects to bring costs down 20 to 30 percent on average.
“The weak pipeline of new projects is resulting in very competitive bidding from the service sector as E&P companies negotiate hard on pre-sanction projects,” said Obo Idornigie, a Wood Mackenzie upstream research analyst.“However, the industry needs to strike a balance between near and long term drivers,” Idornigie said. “Pushing the service sector too hard now is only likely to shore up problems once more attractive fundamentals return.”
The oil industry has cut an estimated 196,000 jobs worldwide since the oil bust began, with nearly half of that figure squeezed out of the oil field service sector, according to energy consultant Graves & Co.
“Increasingly severe job cuts means that the industry is losing skilled resources that will take time to attract back when prices recover,” Idornigie said.