(EnergyAsia, December 19 2014, Friday) — As oil prices collapsed to their lowest levels since July 2009, analysts say the industry may have to defer more than US$900 billion in upstream investments, with some US$150 to US$170 billion at risk next year that will threaten the survival of many players around the world.
In an analysis of 400 of the largest new oil and gas fields outside the US shale basins, investment bank Goldman Sachs said the industry could defer or cancel a total of US$930 billion worth of upstream projects if Brent crude averages US$70 a barrel as they will not be profitable. Since December 17, Brent has fallen below US$60.
If prices remain at current levels, the industry could freeze more than US$150 billion in exploration projects alone for 2015, according to Norwegian consultancy Rystad Energy.
Throwing in the towel, the oil ministers of Iran and the UAE have joined the chorus of market bears in warning that crude prices could fall to as low as US$40 in 2015 on oversupply and slowing global demand growth. After touching a high of US$115 a barrel in June, Brent crude plunged below US$60 on December 17, implying total budget cuts could exceed US$1 trillion if these low prices remain over the coming year.
Consultant Wood Mackenzie is forecasting capital expenditure to fall by 37% or US$170 billion in 2015 if Brent averages US$60 a barrel for the industry to maintain current debt levels.
Western majors like ExxonMobil, Chevron, ConocoPhillips and BP have announced large budget cuts in anticipation of the market’s prolonged weakness. In the UK, North Sea operators are preparing to slash budgets and jobs that will lead to lower oil production.
Operators in advanced and intensive development phases of their projects have the least room to manoeuvre, said Fraser McKay, Wood Mackenzie’s principal corporate analyst.
“Most international oil companies (IOCs) have flexibility to rein in spend to keep finances on an even keel. But shareholder dividends and distributions are likely to be a significant part of the spend cuts for some companies,” he said.
With US$60 Brent, he said only three of the top 40 IOCs will generate sufficient free cash flow to cover expenditure including distributions. Some independents have already cut 2015 discretionary expenditure with crude at US$70-75 per barrel.
The consulting firm also predicts merger and acquisition activities to come to a standstill as companies shelve plans for deal-making and buyers pull out until a new ‘consensus’ emerges typically at least three from the point that prices start to stabilise.
“Weak oil prices through 2015 will ratchet up the pressure on the most financially stretched in the sector. Expect to see falling deal valuations and the emergence of a true buyers’ market,” said Luke Parker, the firm’s principal analyst for M&A.
He predicts “large-scale corporate consolidation” on the scale not seen since the late 1990s as cash-rich buyers prey on distressed sellers.
Oil prices are likely to remain weak as US shale operators are able to extract oil and gas “far more efficiently than before with drilling costs declining and productivity per well increasing,” said consulting firm Douglas Westwood (DW).
US production is expected to grow in 2015 as most unconventional plays will remain supported at the crude price of US$50, with the Bakken’s breakeven point estimated at US$42 a barrel, said DW.
In addition, it said lifting costs have been reduced by some US$30 per barrel since 2012.
“However, shale plays require constant investment in drilling to maintain momentum, as wells decline at up to 60% a year compared to the 7-10% of conventional wells,” said DW.
“Therefore the impact of a continuous oil price decline may only become apparent in 2015/16 after companies’ hedged positions have unwound and external finance becomes to increasingly difficult to attract.”
Despite the gloom, crude oil still sells for nearly double the price of December 2008 when it last crashed to just above US$30 a barrel.