The analyst estimates that as a result, decisions on 20 Bboe of reserves has been pushed back from a range of shallow-water, deepwater and onshore projects, creating a $200-billion hole in the industry’s investment pipeline.
Technically demanding projects with major upfront costs and/or low returns have proven most vulnerable, said principal analyst Angus Rodger, with more than 50% of the deferred reserves in deepwater projects.
The main drivers for the deferrals, he added, are the release of capital in response to the oil price, and the need to develop improved designs, cost optimization, and other measures to improve overall economics.
Inflationary pressures have made many projects economically marginal, so operators are reworking costs and development solutions. But this will not be easy, Rodger claimed: “We estimate that half of the new greenfield developments still produce sub-15% development IRRs, which is below most companies’ economic hurdle rate.”
For most operators, targeting a 10% reduction in capex will not be sufficient to reach a final investment decision, he claimed, as only very few can break even below $50/bbl. So only those assets with the most robust economics can expect to make the grade.
Wood Mackenzie says the majority of these projects now have a targeted start-up between 2019 and 2023. However, if the major IOCs continue to cut future capital commitments, these dates will be pushed back further.