May 27, 2018

Oil, gas projects worth $1.5 trillion at risk | MarketWatch

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LONDON–The world’s biggest oil companies are banking on the cost of everything from rig rates to steel pipe falling to help them weather the swoon in oil prices over the last year, but projects worth around $1.5 trillion remain uneconomic and are unlikely to go ahead, according to a report published by Wood Mackenzie on Monday.

Oil producers big and small are targeting steep cost cuts of around 20%-30% in the face of the biggest slump in oil prices since the 1980s, but they have also had to slash their investment programs and defer projects that remain too expensive at crude’s current price level of around $50 a barrel.

According to Wood Mackenzie, spending is down by $220 billion for 2015 and 2016, compared with the Edinburgh-based consultancy’s pre-oil-price-crash projections. Much of the drop in spending has been focused on projects onshore North America, but nearly 50 projects have been delayed globally, it estimates.

“Additional measures are needed to manage costs,” said James Webb, Wood Mackenzie’s upstream research manager, warning that simply squeezing the service sector won’t be sufficient to meet the industry’s cost-reduction goals. The consultancy said most new oil projects remain uneconomic.

Still, many producers are already benefiting from lower costs.

Shale-oil production in the U.S. has proven much more resilient to low oil prices than many in the industry had anticipated, thanks largely to technological developments and efficiency gains. Royal Dutch Shell PLC RDSA decided in July to push ahead with developing its Appomattox project deep in the waters of the Gulf of Mexico after it succeeded in bringing down the costs by 20%. Exxon Mobil Corp. XOM, +0.98% said during its second-quarter earnings that the cost of engineering services and construction labor have fallen at least 10%, while offshore rig rates are anything from 25% to 40% cheaper than they were.

Still, Wood Mackenzie estimates that supply-chain savings through squeezing the service sector will result in an average cost reduction of just 10%-15%, half what the industry is hoping to achieve. To cut costs sharply, the sector needs to rethink the way it approaches projects, many of which were already expensive when oil was at $100 a barrel.

“A prolonged period of low oil prices over a number of years is likely needed to bring about profound, structural changes to industry costs,” said Wood Mackenzie’s Mr. Webb. “This is unlikely–in our view oil prices will begin to recover from 2017, and there is a real risk that cost inflation pressures then return,” he added.



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