Oil industry faces $1tn spending cut

June 15, 2016

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Oil and gas companies will spend $1tn less on finding and developing reserves between 2015-2020 because of the , a leading consultancy says, stoking fears about potentially tight supplies towards the end of the decade.

, the consultancy, said it expected “upstream” oil and gas spending to be 22 per cent lower than it projected two years ago, before prices started to slide.

The US onshore industry, including shale producers, is suffering some of the deepest cuts, with Russia also expected to see sharp falls, although in some parts of the Middle East, including Saudi Arabia, spending is holding up.

The slowdown in investment is expected to cut next year’s global oil and gas production by 4 per cent. That will help to temper the oversupply that has driven crude prices down, but potentially lay the foundations for tighter markets and rising prices in subsequent years.

The squeeze on oil companies’ cash flows created by lower prices has forced many to cut spending.

, for example, has trimmed its capital spending from $42.5bn in 2013 to a planned $23bn this year, while Chevron is cutting from $41.9bn to $25bn over the same period.

Expectations that oil prices could stay at about $50 a barrel for years to come imply that many possible oil and gas projects will not be economically viable.

Goldman Sachs has calculated that potential projects worth $550bn might be scrapped if oil hovers around $55 per barrel.

So far investment has fallen fastest in North America, where the shale industry is led by small- and midsized companies that face more immediate financial constraints.

The relatively short time needed to drill wells and bring them into production also means that activity is more flexible in the US than in the mega-projects used to develop reserves in other parts of the world.

Wood Mackenzie has halved its estimate of expected capital spending onshore in the “lower 48” states of the US excluding Alaska.

Global spending on exploration to find new oil and gas reserves has also halved since 2014, dropping to an expected $42bn per year in 2016-17.

Falling costs for oilfield services and equipment such as drilling rigs are helping to offset the impact of reduced spending. In some countries, such as Russia, currency devaluation also helps reduce costs.

However, Malcolm Dickson, a principal analyst at Wood Mackenzie, said kick-starting a new wave of projects to provide the supply to meet future demand for oil and gas would require further cost reductions and efficiency gains, as well as “confidence in higher prices and arguably fiscal incentives”.

Gas is likely to be abundant in world markets for a few years at least, as new liquefied natural gas export projects in Australia and the US come on stream and ramp up production.

Oil, however, could be in tighter supply, depending on factors including security-related production outages in countries such as Nigeria, and the strength of global demand growth.

The International Energy Agency, the watchdog backed by developed countries’ governments, said this week that world oil demand had been growing faster than it had previously expected, with consumption up 1.6m barrels per day in the first quarter of 2016.

Category: Oil & Gas