WoodMac: Growing list of deferred upstream projects reaches 68

Final investment decisions on 68 large projects globally totaling $380 billion in capital expenditures were deferred from when crude oil prices first plunged in 2014 to yearend 2015, according to a report by research and consultancy firm Wood Mackenzie Ltd.

The growing tally is documented in “Pre-FID project deferral update: deepwater hit hardest,” which concludes that, during the last half of 2015, an additional 22 major projects and 7 billion boe of commercial reserves were deferred.

Those totals are in addition to the 46 developments and 20 billion boe of reserves previously identified by WoodMac. Of the $380 billion in capex, delayed spend from the 68 projects from 2016 to 2020 totals $170 billion.

In Barclays’ E&P Spending Outlook published this week, the firm indicated that upstream oil and gas companies plan to reduce spending by 15% globally in 2016, representing only the second time spending has fallen in consecutive years in the 31-year history of the survey (OGJ Online, Jan. 13, 2016).

“What began in late-2014 as a haircut to discretionary spend on exploration and predevelopment projects has become a full surgical operation to cut out all nonessential operational and capital expenditure,” explained Angus Rodger, WoodMac principal analyst, upstream research.

The report finds that FIDs on many of the projects have been pushed back to 2017 or beyond, with production startups currently targeting 2020-23. By 2021, deferred liquids volumes will reach 1.5 million b/d, WoodMac projects, rising sharply to 2.9 million b/d by 2025.

Spike in deepwater deferrals

Deferrals of deepwater projects increased to 29 from 17 during the period, representing 62% of total reserves and 56% of total capex, as oil and gas companies have been forced to rework projects with high breakeven prices, large capital requirements, and high costs.

WoodMac notes that average breakeven of 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, adding that costs for deepwater projects have only fallen by 10% despite the global crash in rig day-rates.

Tom Ellacott, WoodMac vice-president of corporate analysis, said that the firm believes “most companies will now be looking for these developments to hit economic hurdle rates at around $60/bbl,” he said. “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.

“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,” Ellacott explained.

Countries named by the report with the largest inventory of delayed oil projects are Canada, Angola, Kazakhstan, Nigeria, Norway and the US, which hold 90% of all deferred liquids reserves. This includes oil sands, onshore, shallow-water, and deepwater assets in both greenfield and incremental developments.

Countries with the largest gas reserves delayed are Mozambique, Australia, Malaysia, and Indonesia, which combined hold 85% of the total volume. “The majority of this gas is found offshore, primarily in deepwater locations, and requires complex and expensive development solutions, including greenfield LNG and [floating LNG],” Rodger said.

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