More Than $150B of Oil Projects Face the Axe in 2015

Reuters via Rig Zone ^ | December 05, 2014 | Ron Bousso

[thackney]

Global oil and gas exploration projects worth more than $150 billion are likely to be put on hold next year as plunging oil prices render them uneconomic, data shows, potentially curbing supplies by the end of the decade.

As big oil fields that were discovered decades ago begin to deplete, oil companies are trying to access more complex and hard to reach fields located in some cases deep under sea level. But at the same time, the cost of production has risen sharply given the rising cost of raw materials and the need for expensive new technology to reach the oil.

Now the outlook for onshore and offshore developments - from the Barents Sea to the Gulf or Mexico - looks as uncertain as the price of oil, which has plunged by 40 percent in the last five months to around $70 a barrel.

Next year companies will make final investment decisions (FIDs) on a total of 800 oil and gas projects worth $500 billion and totalling nearly 60 billion barrels of oil equivalent, according to data from Norwegian consultancy Rystad Energy.

But with analysts forecasting oil to average $82.50 a barrel next year, around one third of the spending, or a fifth of the volume, is unlikely to be approved, head of analysis at Rystad Energy Per Magnus Nysveen said.

"At $70 a barrel, half of the overall volumes are at risk," he said.

Around one third of the projects scheduled for FID in 2015 are so-called unconventional, where oil and gas are extracted using horizontal drilling, in what is known as fracking, or mining.

Of those 20 billion barrels, around half are located in Canada's oil sands and Venezuela's tar sands, according to Nysveen.

Geographically, the projects on the balance are widespread.

[thackney]

[Rappini]

Never fails, OPEC cuts prices and shuts down competition.

[stremba]

Maybe I’m missing something here, but is this really something to be concerned about? Oil prices fall so new drilling projects get shut down. Shutting down new drilling projects restricts supply, so prices stop falling. Eventually, an equilibrium is reached where the profitability of new projects matches the price of oil. That is pretty much the definition of a free-market price. I thought we believed in the free market around here.

[thackney]

We do. I’m not suggesting any governmental change. I’m just reporting current status and where we are on the roller-coaster.

[okie01]

That is pretty much the definition of a free-market price. I thought we believed in the free market around here.

Sorry, but so long as the price is being set by a government entity -- in this case, the Saudis -- it's NOT a free market.

[sitetest]

Dear thackney,

I imagine that this will change the valance in the industry from “drill at [almost] any price” to, “is there a way to do this faster, better, cheaper?”

I'd read that at the height of the boom, companies were paying premiums for the resources needed to develop new projects. They probably were most focused on making hay while the sun shone, not primarily in finding ways to further innovate and bring down costs (although I imagine that happened also - the more these companies engaged in these newer methodologies, the better they became at them, and as in other fields, they learned lots of new stuff along the way that helped them incrementally reduce costs over time).

Now, with prices low, companies have two choices: shelve projects for now and wait for prices to rebound; or devote more time, energy, and resources to figuring out how to do the work profitably at lower prices. Some projects will be shelved, but I imagine some companies will put relatively greater effort to trying to produce profitably at lower price points.

Then, as prices rise, the efforts to reduce costs will be applied more broadly to a greater range of projects, resulting in more production at lower costs, meaning that overall, the US oil industry will be more competitive than before the price drop.

sitetest

[thackney]

I’ve never had a client that wasn’t interested in faster, cheaper at any time, at any price.

Premiums have definitely been paid while the industry was in strong competition for labor, materials and equipment. And this means, some of the quality suffered on all of that. Price, schedule and quality. The client/buyer only gets to pick 2 of those 3.

Average prices will go down, including for the break even costs. But some of that isn’t a change, it is just shelving the more expensive side of items.

For an example, say a company has 10 areas where they were considering investing for new oil production. Break even cost for them are: 51, 53, 55, 57, 59, 61, 63, 65, 67, 69 $/bbl. Their average break even costs are $60/bbl.

If they just shelve the top 5 most expensive projects, they just lowered their break-even cost to $55/bbl. No technology change, but still lower average cost. They will just produce less until prices climb up.