Plunge in Oil Prices Forces Re-Evaluation of Projects

Plunge in Oil Prices Forces Re-Evaluation of ProjectsPlunge in Oil Prices Forces Re-Evaluation of Projects

A 40 percent drop in oil prices over the last year has shaken up the energy sector, forcing companies to re-evaluate projects worth billions of dollars and sift through balance sheets to cut costs, executives said this week at a conference in Malaysia, Reuters reported.

Companies are also looking at forming alliances to reduce risk as they ride out the volatile oil price trough, and some expect further consolidation in the industry as low prices force cash-strapped companies out of the market.

Still, there is unlikely to be a wave of mega mergers like Royal Dutch Shell’s buyout of BG Group for $70 billion, which Shell itself has said left it cash-strapped and only able to pursue much smaller deals.

“There is less need for mega mergers because of unconventional resources which require a small amount of capital management,” ConocoPhillips Chief Executive Officer Ryan Lance told the conference. “There is little investor support for mega-deals. We don’t believe the timing is right and also oil prices need to stabilize.”

But the drive to save costs and improve efficiency will lead to more partnerships among companies, other executives said.

Global oil prices have climbed more than 40 percent from six-year lows last January to touch 2015 highs in early May, but prices remain about half of their peaks of June 2014, when growing evidence of a worldwide glut sent crude markets into free fall.

The drop in oil prices has led to more than $100 billion in oil projects being “slowed, postponed or axed”, the Financial Times reported on Tuesday, citing a study it commissioned of the energy sector.

The “industry became lazy” over the past few years when oil prices were stable at much higher levels, said Ayman Asfari, chief executive officer at oilfield service company Petrofac.

Before prices plunged last year, the Brent crude benchmark had been steady for three years in a $100-$120 per barrel range. Asfari said that 82 percent of projects delivered in the last 10 years exceeded budget and half of them failed to meet schedules. Producers of unconventional resources in the United States, by contrast, were constantly looking at ways to produce more oil and gas at lower costs, he said.

Instead of tailor-made projects, companies could look at standardising units, he said, citing the examples of U.S. LNG exporter Cheniere Energy’s cookie-cutter approach to building liquefaction trains, standard design for floating production storage offloading (FPSO) units employed by Petrobras , and Statoil’s standard subsea structures.