Global upstream development spend from 2015 to 2020 has been cut by 22% or US$740 billion since the oil price started to drop two years ago, according Wood Mackenzie's research. When cuts to conventional exploration investment are included, the figure increases to just over US$1 trillion.
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," said Dickson.
Russia has also seen a large drop off, with investment down by 40% over the next two years - but much of this is the due to the rouble depreciating against the dollar. Russia is keen to maintain its production and to do that it needs to keep drilling. In March 2016, the country reached yet another post-Soviet liquids production record of 10.9 MMbbl/d.
By contrast, the Middle East has generally been less impacted, as several countries there spend to maintain market share. For instance, there will be no drop in Saudi Arabian investment in 2016/17.
The global capex cuts have had a knock-on impact on production. Wood Mackenzie expects seven billion barrels of oil equivalent less to be produced from 2016-2020 than was expected before the oil price drop. In the nearer term, as a result of the price drop, it forecasts 3% or 5 MMboe/d less global production in 2016 and 4% or 6 MMboe/d less in 2017, with onshore US accounting for 70% of the fall.
"In the main, discretionary projects have been hardest hit with conventional pre-FID (final investment decision) greenfield investment alone down US$80 billion from 2016 to 2020," Dickson said. Deepwater fields have suffered the most - spend on deep and ultra-deep projects has been cut by nearly 40% in 2016-2017.
Conventional exploration investment for 2015-2020 is US$300 billion less than we would have expected in 2014.
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," said Dickson.