Market Analysis The Impact of Low Oil Prices on Planned Oil and Gas Projects

Editor: Anke Geipel-Kern

The impact of lower oil prices on planned on upstream oil and gas projects is brutal, says Wood Mackenzie. The energy intelligence group, has updated its analysis published in July 2015. We present the most interesting findings.

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Deepwater projects have been hit hardes.
Deepwater projects have been hit hardes.
(Picture: Daniel Sinoca; CC0;)

Edinburg/Houston (Source: Wood Mackenzie) – Wood Mackenzie, an energy intelligence group, has updated its analysis published in July 2015 on the impact of continued low oil prices on upstream oil and gas projects.

It concludes that in the last six months of 2015 an additional 22 major projects and seven billion barrels of oil equivalent (boe) of commercial reserves have been deferred, on top of the 46 developments and 20 billion boe of reserves identified previously. Deepwater projects have been hit hardest, accounting for over half of the total, as companies are forced to rework projects with high breakevens, large capital requirements and high costs.

Why the List of Delayed Projects is Growing

Mr Angus Rodger, Principal Analyst – Upstream Research for Wood Mackenzie, explains: “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. 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 report ‘Pre-FID project deferral update: deepwater hit hardest’ has identified 68 large projects globally that have had FID delayed due to the fall in oil prices since the oil price crash in 2014 to the end of 2015. The list has grown by over a third in the last six months, as more and more projects are deferred through the down-cycle. Mr Rodger adds: “For all 68 projects there are multiple elements contributing to delay. Price is rarely the only factor slowing down FID - but it has exerted the strongest influence.”

“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,” Mr Rodger adds. And the analysis shows that 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, 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.”