$200bn of projects could be shelved by year-end

Jul 28, 2015 12:00 AM

Around $200bn of upstream oil and gas projects could be shelved by the end of 2015, according to Wood Mackenzie.

The fall in oil prices has already seen 45 major project final investment decisions (FID) deferrals this year.

“As a result, we estimate 20bn boe of reserves has been pushed back from a diverse range of onshore, shallow-water and deepwater projects,” said Angus Rodger, principal analyst, Wood Mackenzie

“Together, this creates a $200bn hole in the industry’s investment pipeline.

“Projects that are technically challenging, have significant upfront costs and/or low returns have proved vulnerable – over 50% of the 20 billion boe is located in deepwater projects, and nearly 30% in the Canadian oil sands.”

Rodger added that from a corporate perspective, there are two main drivers for deferring projects: releasing capital in response to the fall in oil prices; and giving more time to develop enhanced designs, cost optimisation and other measures to improve overall economics.

“In essence, rebuilding projects for a lower price environment,” he added.

The research note added: “Inflationary pressures have pushed many projects into economically marginal territory and operators are now reworking costs and development solutions to achieve their hurdle rates. But it won’t be easy. We estimate that half of the new greenfield developments still produce sub-15% development IRRs, which is below most companies’ economic hurdle rate.

“For most operators, hoping a 10% reduction in capex is sufficient to reach FID won’t be enough, as only a handful have an NPV10 breakeven below US$50/bbl. Given where we are in the corporate capex cycle, only those assets with the most robust economics can expect to make the grade.

“We estimate the majority of these projects are now targeting start-up between 2019 and 2023. However, if the major IOCs continue to focus on cutting future capital commitments – to the detriment of future production growth – then these dates will be pushed back further.

“For some, aggressive re-phasing of capital spend and savings from cost deflation will enable them to have another run at FID over the next six to 12 months. But in a world of greater financial discipline and lower oil prices, others will require more radical changes to make them attractive investments.”

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