Oil and gas projects worth an estimated $380 billion have been cancelled since 2014, according to a new estimate from Wood Mackenzie.
The downturn in oil prices has hit projects worldwide and the global energy research group says 68 major projects were scrapped in 2015, which account for around 27 billion barrels of oil and natural gas, OilPrice reported.
In the latter half of 2015 when oil prices fell once again following a modest rebound in spring, the industry shelved 22 major projects worth 7 billion barrels of oil equivalent.
“The impact of lower oil prices on company plans has been brutal. 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,” Wood Mackenzie analyst Angus Rodger said in a statement.
The cancellations will lead to dramatically lower oil production in the years ahead. An estimated $170 billion in capital expenditure was slashed for the period between 2016 and 2020.
Industry cuts will translate into at least 2.9 million barrels of oil production per day that will not come on stream until at least sometime next decade.
Breakeven Costs
The average breakeven costs for all the projects that Wood Mackenzie surveyed stood at around $60 per barrel.
Most of the projects that suffered cuts were in deepwater, which tend to suffer from much higher development costs.
For example, projects in the Gulf of Mexico, offshore Nigeria and Angola will be deferred until the 2020s. Canada’s expensive oil sands have also seen investment dry up. The $380 billion in spending cuts identified far exceeded the $200 billion that Wood Mackenzie totaled in June 2015.
Energy analysts are falling over each other with new estimates for where the price of oil will bottom out. Goldman Sachs was one of the first to call for $20 oil last year, but now everyone is jumping on the bandwagon.
Morgan Stanley says $20 oil is possible, with much of the blame put on the strength of the dollar. Standard Chartered, not to be outdone, says oil could fall to $10 per barrel. The extended slump for oil is setting up the world for a situation in which supply fails to meet demand in the not-so-distant future. The Wood Mackenzie report shines a spotlight on this phenomenon, which is becoming increasingly likely.
The world is oversupplied right now by some 1 million bpd. But the industry is shelving nearly 3 million bpd in future output because of conditions today. Lasting financial damage will lead to a shortfall in investment and a slowdown in spending that could outlast the oil bust.
As the years pass and that production fails to go on stream, demand could start to outstrip supply, potentially leading to a price spike.
The difference between the 1980s, the last time the world had to work through a supply-side oil bust, is that today the oil markets are not as oversupplied as they seem.
At this point, OPEC is producing flat out. Spare capacity hit 1.33 million bpd in the third quarter of 2015–the lowest level since 2008. It is hard to imagine a shortage when oil is dipping below $30 per barrel. But global supplies could very well tighten in the next few years.
