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The Crystal-Ball is Murky for Future O&G Capex

Global energy consultancy Wood Mackenzie has presented an analysis on the continued impact of low oil prices for the upstream oil and gas sector. The report reveals that projects worth $380 billion have been postponed since 2014 as firms slash costs to survive the crash.

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“Brutal.” That’s how one analyst, Angus Rodger (Wood Mackenzie) summed up the impact of falling oil prices on long term project planning, particularly the deep water variety. “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.”

The black list increased by a third in the last six months as the train crash that is global oil prices continued to career down the tracks.

Barclays published its E&P Spending Outlook in the middle of January and it showed that firms plan on reducing global spend by 15% this year. It’s been noted that this is only the second time in 31 years that there has been a consecutive year of global spending cuts.

In terms of delayed oil projects the worst affected countries are US, Canada, Nigeria, Norway, Angola and Kazakhstan which together hold 90% of all deferred liquids reserves. Mozambique, Malaysia, Australia and Indonesia are worst affected by the delays to gas projects. As Rodger points out, “The majority of this gas is found offshore, primarily in deep-water locations and requires complex and expensive development solutions, including greenfield LNG and floating LNG.”

If you’ve tried to buy a house since 2009, what I’m about to say next is no surprise. Borrowing is a lot tougher. And since oil prices sank in 2014 producers are being put through the wringer. “Companies are having to adjust investment strategies to the risk of sustained low prices and this means tougher screening criteria for pre-FID projects,” said Tom Ellacott Wood Mackenzie’s VP of Corporate Analysis. “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.”

Between November 1985 and March 1986 the price of a barrel of crude fell by 67%. Since June 2014 it’s sunk 57% with no end in sight. The Wall Street Journal remarks that then, “it took two decades for oil prices to rebound,” and that was before a new contender to the throne emerged – shale. The threat posed by developments in the US market has prompted OPEC to adopt a counter-strategy, which has yet to have been proved successful.

Forbes’ Robert Rapier wrote, “I suspect if Saudi Arabia were able to travel back in time to OPEC’s November 2014 meeting, the oil markets would look very different today…I think the group made a monumental miscalculation at that 2014 meeting.” He estimates had they accepted a small market share cut, they’d be collectively up $541bn now. Instead they are that much worse off. Zhu Min the International Monetary Fund’s deputy director put it best: “Shale has become the swing producer. OPEC has clearly lost its monopoly power and can only set a bottom for prices.”

Far from being a pesky nuisance that could be easily swatted, shale has proven to be quite the pitbull. While there’s been a rise in bankruptcy across the sector, other players have down-sized and increased output. And for every one of those to hit the wall, there is a pack of hedge funds breathlessly waiting to snap them up and bide their time until the market improves. When credit was cheap the market boomed and advances in technology soared. It’s meant that since 2009 output from rigs has increased fourfold. They can cope better with lower prices. The man seen as the guru of energy analysis Daniel Yergin, IHS Cambridge Energy Research Associates’ founder, says, “$60 is the new $90.”

We literally face the great unknown – shale has only boomed in the past five years and this is the first downturn. Leonardo Maugeri a former EniSpA executive says, “While continued low prices will eventually bring the market into balance, it is unclear how long that will take and what the new price equilibrium will be.”

There are renewed internal calls for an emergency OPEC meeting, but you wouldn’t be alone if you thought things had to get even worse for anything to change the Saudi Arabia’s mind now. Oh yes..

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