Energy groups slash US$100 bln of spending amid oil rout

May 19, 2015 09:24
Oil companies say it's uneconomical to develop new energy projects or upgrade existing facilities amid plunging oil prices. Photo: Bloomberg

Energy companies are holding back on more than US$100 bilion of new spending amid plunging oil prices.

As a result, new projects have been slowed, postponed or scrapped, the Financial Times reported Tuesday.

Companies including Royal Dutch Shell, BP, ConocoPhillips and Statoil are leading moves to slash capital spending on 26 major projects worldwide, the report said citing in-house research.

The delays and cancellations, many disclosed quietly in recent weeks and months, come amid a wider retrenchment by the industry that has seen thousands lose their jobs and led to a slowdown in the shale boom in the United States.

The research by consultancy Rystad Energy shows producers have targeted some of the highest-cost areas as they have trimmed spending, with nine Canadian oil sands projects put back, each ranging from US$1  billion to US$10 billion in planned expenditure.

“Things are moving to the right and the particular area that is suffering is western Canada,” said Alastair Syme, energy analyst at Citigroup.

“It is one area of the world outside US shale, where companies are actually stopping investment in train.”

After reaching US$115 a barrel in June last year, the price of oil plummeted to a low of US$45 in January as surging output of US shale oil and softening demand in Asia stoked a glut in the market.

The decline accelerated after OPEC, led by Saudi Arabia, decided not to cut production to support prices. Crude has since rebounded to about US$66.

While the US$118 billion total expenditure would be spread over several years, the impact of deferring investment on such projects would be to delay future production, with as many as 1.5 millon barrels a day — nearly 2 per cent of global oil output in 2013 — to come two years later than planned, Rystad said.

The project deferrals that have already been announced could be just the start of a big wave of delays.

Goldman Sachs has identified 61 new projects, more than half of those awaiting final approval, as uneconomic at an oil price of US$60 a barrel, putting more than US$750 billlion of capital expenditure at risk and 10.5 million barrels a day of peak production.

Seventeen countries, including Angola, Nigeria, Australia and Algeria, were likely to see investment in projects fall by more than 50 per cent between now and 2020 assuming prices stayed low, Goldman’s Michele della Vigna said.

Calgary-based Cenovus Energy said it had deferred work on its 130,000 barrels a day Narrows Lake oil sands development “due to the substantial decline in crude oil prices”.

Other “heavy” oil projects, where extraction is closer to mining than conventional drilling, have been halted.

Carlos Cabrera, executive chairman of Ivanhoe Energy, said its Pungarayacu project in Ecuador has been suspended in part because “the precipitous drop in the oil price” had rendered uneconomic production of a possible two billion to three billion barrels.

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