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Upstream Investments 'Very Much at Risk' at $50 Oil, Says Wood Mackenzie

Upstream operators may be looking for cost reductions averaging up to 30% on projects in the low commodity world, but squeezing the oilfield services sector may only achieve a savings of 10-15%, which means investments will take a back seat until prices rebound, Wood Mackenzie said Monday.

Close to $1.5 trillion of uncommitted worldwide spend by the upstream sector may be uneconomic at $50/bbl oil for both new conventional projects and North American unconventional oil, researchers estimated. West Texas Intermediate front-month prices on Monday morning were trading around $45.55/bbl.

At $50 oil, exploration and production (E&P) companies are focusing on project optimization and adopt smarter ways of working with the oilfield services (OFS) sector to ensure projects remain economically viable.

"As the upstream industry responds to the low oil price, investment is down $220 billion in 2015 and 2016, compared with our pre-oil price crash projections," noted Wood Mackenzie's James Webb, upstream research manager.

In addition to the massive fall-off in activity in North America's onshore, Wood Mackenzie estimated that 46 total new, or pre-sanctioned, global projects have been deferred since commodity prices plunged in 2014.

"We estimate that as much as $1.5 trillion of investment spend destined for new (pre-sanctioned) and U.S. tight oil projects is now out of the money, or in starker terms, uneconomic at a $50 oil price," said Webb. "This spend is very much at risk."

The price debacle has had a "huge" impact the OFS sector, "which is of a size to comfortably accommodate an average of 40-50 new projects globally a year," principal upstream research analyst Obo Idornigie. "We expect just six new projects to go ahead in 2015 and around 10 in 2016."

This "weak" pipeline of new projects has resulted in competitive bidding as E&P companies "negotiate hard on pre-sanction projects. We believe that pre-sanction offshore projects could benefit from 10-15% cost reductions through supply chain savings alone. However, the industry needs to strike a balance between near and long term drivers.

"Pushing the service sector too hard now is only likely to shore up problems once more attractive fundamentals return." The "increasingly severe job cuts means that the industry is losing skilled resources that will take time to attract back when prices recover."

To achieve a cost savings of 20-30%, E&Ps should consider "re-working field development plans, optimizing project design and more innovative approaches to project management will all play important parts," said Webb.

Low prices over several years likely would be needed to bring about "profound, structural changes to industry costs," Webb said.

However, oil prices should begin to recover from 2017, and "there is a real risk that cost inflation pressures then return. Stronger collaboration between operators and service companies will be key in driving efficient practices.

"The winners therefore are likely to be operators with a strong pipeline of near-term projects close to sanction, which are able to take advantage of the trough in costs through 2015/2016."

Select projects that will take years to complete are being sanctioned. For example, Royal Dutch Shell plc's Appomattox project in the deepwater Gulf of Mexico (GOM) was sanctioned in July after the project managers succeeded in reducing costs by 20% (see Daily GPIJuly 1). Shell engineers reduced the total project cost through supply chain savings, design improvements and by reducing the number of wells required.

However, as prospects dim for a price recovery, many big operators are rephasing, deferring and canceling projects. Many new supply prospects, including several in the deepwater GOM, are on the drawing board or nearing completion, but "sustained spending cuts will hurt longer-term production growth, and curves will flatten in the post-2017 timeframe," Moody's Investors Service said earlier this month (see Daily GPISept. 16).

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