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Global upstream investment slashed by $1trillion since oil price fall says Wood Mac

Oil prices
Oil prices

The oil and gas industry will cut $1 trillion from planned spending on exploration and development because of the slump in prices, leading to slower growth in production, according to consultant Wood Mackenzie.

Malcolm Dickson, Principal Analyst at Wood Mackenzie said: “The impact of falling oil prices on global upstream development spend has been enormous.

“Companies have responded to the fall by deferring or cancelling projects and costs have also fallen.

“Our 2015-2020 forecast for capital investment has been reduced by 22% or US$740 billion since Q4 2014. In the nearer term the impact is even more severe: compared to pre-oil price fall expectations, capex will be down by around US$370 billion or 30% in 2016 and 2017.”

Wood Mackenzie expects to see further cuts throughout the year and investment levels continue to shrink as more projects are dropped and companies struggle to breakeven.

“Virtually every oil producing country has seen some form of capex cuts. The deepest are in the US Lower 48, where forecast capital investment has halved in 2016-17, falling by US$125 billion. This is mainly down to a big drop-off in drilling, with the onshore rig count dropping by 53% from 2015 to 2016,” says Dickson.

A global supply glut caused by the increase in shale oil production in the US, coupled with OPEC’s decision to keep pumping to preserve market share, triggered the collapse in oil prices in 2014.

While Brent crude, the international benchmark, has rebounded more than 75 percent from a 12-year low in January, the current price of about $49 a barrel is still less than half the level two years ago and has led to loss of hundreds of thousands of jobs around the world, with an estimated 120,000 lost in the UK North Sea alone.

The U.S. has experienced the steepest cuts in spending. Forecast capital investment there is down by half for this year and next, a drop of around $125 billion, mainly due to a decline in drilling, Dickson said in the report.

The Middle East is the region least affected, with no drop in investment expected in Saudi Arabia — the world’s largest crude exporter — for this year and next. That’s because several countries in the region are spending to maintain their market share, the report said.

The investment cuts are taking a toll on production. Compared with expectations before the slide in oil prices, output this year will be 5 million barrels of oil equivalent a day lower, with the deficit widening to 6 million next year, Wood Mackenzie estimates.

Part of the reduction in spending stems from a drop in the cost of doing business. Costs in the U.S. unconventional oil and gas industry were a quarter lower on average compared with their peak in 2014, Wood Mackenzie said. In Russia, the 40 percent reduction in investment in dollar terms anticipated over the next two years is due in large part to the depreciation of the ruble, it said.

Dr Andrew Latham, Vice President of exploration research at Wood Mackenzie said: “Although exploration investment has more than halved since 2014, and the figure is expected to be around US$42 billion per annum for 2016 and the same in 2017, costs have not been cut as much and as quickly as we expected. Some deepwater exploration spend has been protected by long rig contracts, but as these unwind we expect sharper cuts than in non-deepwater.”

On a more positive note for operators, cost deflation has played a major role in driving down spend. For example, costs in the US unconventional sector in 2015 fell by 25% on average from peak in 2014. Wood Mackenzie’s models show 2016 is likely to yield another 10%.

“For now, the select few projects that are progressed will do so because costs have been cut substantially to hit economic hurdle rates. But kick-starting the next investment cycle will require more cost deflation and project scope optimisation along with confidence in higher prices and arguably fiscal incentives.” says Dickson.

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