Almost a trillion dollars of spending on future oil projects is at risk after a brutal plunge in crude prices to below $60 a barrel. 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 the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects - the lifeblood of future petrol supplies, heating fuels and chemicals. Projects in challenging frontier regions like the deep waters of the Gulf of Mexico are predicated on high oil prices and may not be economic with oil at $50 το $60 a barrel. 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. The bank shows that, if prices stay at their current level, 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. In total, the production at risk from such fields adds up to $930bn of investment. Companies' costs, including capital expenditure, would need to fall by 20 to 30 per cent to make the projects profitable at $70 a barrel, says Goldman.
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 there will be billions of dollars of spending cuts next year alone, including to capex budgets, action that could lead to a wave of asset sales and delays to new projects in high-cost areas such as Canada's oil sands and mature, less economically attractive regions such as 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 - 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 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. "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," said Simon Flowers, head of corporate research at Wood Mac.
