EDINBURGH, UK – Low oil prices have hit new deepwater projects hardest, according to analyst Wood Mackenzie, as companies find themselves forced to rework developments with high breakevens, large capital requirements, and high costs.
Angus Rodger, principal analyst – upstream research, said: “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.”
Wood Mackenzie’s has identified 68 large projects globally that have had their FIDs delayed since the oil price crash in 2014 through to the end of 2015. The list has risen by more than one-third in the last six months, as more and more projects are deferred. Findings include:
- $380 billion of total project capex deferred (real terms) from the 68 projects
- Delayed spend from these projects during 2016-2020 totals $170 billion
- Deepwater the worst affected, accounting for 62% of total reserves and 56% of total capex
- 2.9 MMb/d of liquids production pushed back to the early 2020s
- Oil most impacted, with deferred liquid volumes up 44%, against 24% for gas
- Average breakeven for delayed greenfield projects is $62/boe.
“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,” Rodger said. 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,” he explained, “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.”
Tom Ellacott, vice president of corporate analysis for Wood Mackenzie, added: “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…
“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…By 2021 deferred volumes will reach 1.5 MMb/d, rising sharply to 2.9 MM b/d by 2025.”
Although FIDs on many projects have been postponed to 2017 or beyond, with first production targeted for 2020-2023, output could be delayed further if prices do not recover and/or costs do not fall enough.
According to the analyst, the countries 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. This includes oil sands, onshore, shallow-water and deepwater assets in both greenfield and incremental developments.
The countries with the largest gas reserves pending development are Mozambique, Australia, Malaysia, and Indonesia, which hold 85% of the total volume. Most of this gas is offshore, mainly in deepwater, and requires complex and expensive development solutions, including greenfield LNG and FLNG.
Wood Mackenzie expects oil and gas companies to be forced to go into survival mode during the year ahead, with further project delays and cuts to discretionary investment highly probable.
Companies are also being forced to re-evaluate how they can profitably develop large, high-cost conventional resources at low prices. Low prices could promote a level of innovation so far only seen in US tight oil, in which case the pace of capex and opex deflation may produce surprise upside.
The analyst anticipates that oil prices will start recovering during the second half of the year, encouraging first-movers to kick-start investment and take advantage of gains from cost deflation.