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Producers Rethinking Offshore, International Projects, Says Raymond James

Since the downcycle in the oil markets began last year, up to 6 million b/d of global oil projects -- mostly in the offshore or overseas -- face cancellation or extended delays, Raymond James & Associates analysts said Monday.

In the Energy Stat of the Week, J. Marshall Adkins, Pavel Molchanov and Rich Eychner said the massive transformation from the high-priced offshore/international arena five years ago to less expensive U.S. land has caused a broad shift -- and a huge price differential. Now faced higher costs overseas and in the offshore, combined with a dismal oil price, many operators are rethinking their plans.

Offshore/international breakeven oil prices last year rose to around $90/bbl, while U.S. land breakevens fell to around $60, according to Raymond James. For cash-strapped operators, the difference is stark enough now to force projects to be shelved, for a while or forever.

"These (frequently uneconomic) projects are located in a diverse range of geographies" that include the Gulf of Mexico and Canada's oilsands that all told represent close to 5 million b/d of global supply growth. "The bottom line is that while the headline number overstates the potential impact, there will likely be meaningful non-OPEC, ex-U.S. supply declines that should positively impact oil prices starting in 2017 and continuing into 2019."

In the U.S. Gulf of Mexico, the publicly announced list of projects that were to have final investment decisions (FID) this year have been pushed forward by months or years, including:

  • BP plc's Mad Dog South, 140,000 b/d at full capacity, now scheduled for FID late this year;
  • Royal Dutch Shell plc's Appomattox, 150,000 b/d at capacity, with FID pushed to late this year;
  • Chevron Corp.'s Big Foot, 75,000 b/d at capacity, delayed indefinitely because of mechanical issues; and
  • Shell's Vito, 75,000 b/d capacity, FID delayed to 2016.

BP also has delayed to 2016/2017 the FID for the Liberty project in Alaska, which had been scheduled this year. There’s also at least 20 Canada oilsands projects now delayed or canceled.

Wood Mackenzie Ltd. last month estimated that 46 global oil and gas projects, representing more than $200 billion in deferred capital spend, had been shelved on the decline in oil prices (see Daily GPIJuly 28).

The delayed/canceled projects list compiled by the Raymond James team has three things in common: upstream capacity of at least 20,000 b/d; at least 24 months of construction/development activity; and cancellations/delays have occurred since January 2014. Based on that criteria, analysts estimated that at least 4.8 million b/d of project delays/cancellations, and likely more, have been announced over the past year.

In March, the Raymond James team estimated that the commodity price decline had curtailed twice as much U.S. upstream spend than the global average (see Daily GPIMarch 24).

Estimated start times of many of the deferred projects begin in 2016 through the end of the decade. The actual start times could have faced delays anyway because of normal project downtime, such as Big Foot, and many projects (in Brazil, for instance) were doubtful to begin with, noted the Raymond James team However, enough projects now are back on the shelf to lead them to expect a decline in global output over the next few years.

"Specifically, we think global oil supply relative to our current oil model could be 300,000 b/d lower in 2017, 500,000 b/d lower in 2018, and 750,000 b/d lower in 2019," said the analysts. "Even though these numbers are much smaller than the 5 million b/d-plus headline numbers, they still represent a more bullish oil price outlook for 2017 and beyond than our current model."

Based on Raymond James' modeling, 335,000 b/d of projects have been "explicitly canceled outright," with 518,000 b/d delayed indefinitely, which often implies cancellation. Another 1.9 million b/d of projects is delayed by more than a year, while more than 2 million b/d is delayed by one year or less.

Meanwhile, Tudor, Pickering, Holt & Co. (TPH) has been tracking exploration and production capital spending by U.S. operators through the first half of this year (1H015). Early indications are that 1H2015 spending took on average 60-70% of full-year fiscal budgets for the onshore explorers. With the front-loaded spending, that means that through the second half of this year (2H2015), E&Ps would need to spend on average about 20% per quarter of their remaining 2015 budgets to stay within guidance.

Overspending "will be punished," TPH's analysts said. "Expectations for those E&Ps that have reported so far are for average daily oil volumes to decline 2% as we head into 2H2015, further supporting production rolling over and helping to balance global supply/demand," according to TPH.

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