Plunging crude prices threaten the axe for $1tn of energy projects
Almost $1tn of spending on future oil projects is at risk after the dramatic plunge in crude prices to nearly $60 a barrel, Goldman Sachs has warned.
Any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the coming decade, or 8 per cent of current global oil demand.
The findings suggest that the supply glut that has sent prices tumbling this year could soon vanish as the oil majors delay big-ticket production projects, the lifeblood of future fuel supplies.
Brent, the international benchmark, has fallen more than 45 per cent since mid-June amid surging US shale production, strong supply from the Opec cartel and weak global oil demand.
The price plunge has shaken the energy industry, throwing some of the majors' most ambitious plans into doubt and pummelling oil shares.
Projects in challenging frontier regions such as the deep waters of the Gulf of Mexico are predicated on high oil prices and may not be economic with oil at about $61 a barrel, the level Brent was trading at yesterday afternoon.
Goldman has examined 400 oil and gasfields around the world, many of which are still awaiting a final investment decision. Its analysis, based on a $70 oil price, shows that fields representing 2.3m b/d of output by 2020 and awaiting a green light have now become uneconomic. That figure rises to 7.5m b/d of production by 2025. The analysis excludes US shale.
Goldman shows that companies will need to cut costs by up to 30 per cent - for example by forcing suppliers to take steep price cuts - to make these projects profitable at $70 a barrel.
In total, the production at risk from such fields adds up to $930bn of investment.
Executives at US and European oil and gas groups are urgently reviewing their budgets in the wake of crude's collapse.
Several have signalled privately that there will be billions of dollars of spending cuts next year alone, including to capital expenditure budgets, action that could lead to a wave of asset sales and delays to new ventures in high-cost areas, such as Canada's oil sands, and mature, less economically attractive regions, including the North Sea.
"This is getting significant attention and we will be pulling all the levers," said one senior boardroom figure.
The majors are determined to maintain dividend payouts - which are a big reason why investors hold their shares - even as falling oil revenues make it harder to meet these from cash flow alone.
To make projects economic again, they are expected to take an axe to contracts with the oil services groups that supply them, renegotiating prices and reducing exploration drilling.
Michele della Vigna, of Goldman, said: "This environment of project deferral and cost deflation will be extremely challenging for oil service providers, especially capital intensive companies such as drillers, subsea construction and seismic survey groups."
Figures from Wood Mackenzie, the energy consultancy, also point to a sharp fall in spending. They suggest the industry could cut a quarter of its capital expenditure over the next five years, by as much as $250bn annually by 2018.
Simon Flowers, head of corporate research at Wood Mackenzie, said: "They are all going to have to reduce their budgets because projects that worked at $80 to $90 planning prices are hard to justify at current levels."
Copyright The Financial Times Limited 2014
(c) 2014 The Financial Times Limited