Energy
Low Crude Oil Prices Risk $1.5 Trillion in New Investment
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The estimate was released Monday morning by energy consultancy Wood Mackenzie. The researchers noted that while operators are looking for cost reductions of 20% to 30% on projects, squeezing the oilfield services sector stands to result in savings averaging just half that.
Wood Mackenzie’s upstream research manager said:
As the upstream industry responds to the low oil price, investment is down $220 billion in 2015 and 2016 compared with our pre-oil price crash projections. In addition to reduced activity onshore North America, a total of 46 projects have been deferred as a result of the oil price fall. We estimate that as much as $1.5 trillion of investment spend destined for new (pre-sanctioned) and US tight oil projects is now out of the money, or in starker terms, uneconomic at a $50 oil price. … The implications of this level of reduced investment is huge for the industry’s service sector which is of a size to comfortably accommodate an average of 40-50 new projects globally a year. We expect just six new projects to go ahead in 2015 and around ten in 2016.
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The largest oilfield services firm by market cap, Schlumberger Ltd. (NYSE: SLB), last month announced it had signed an agreement to acquire Cameron International Corp. (NYSE: CAM) in a cash and stock deal valued at about $12.7 billion. A significant part of the rationale for the acquisition was to be able to offer customers better value through lower prices and improved technology.
But if Wood Mackenzie is right, and Schlumberger was counting on being able to offer producers the 20% to 30% savings they seek, that ability is in serious jeopardy.
Likewise, the merger between Halliburton Co. (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) looks to offer production companies more economical services. When the deal was announced last November, Halliburton expected the $35 billion deal to result in about $2 billion in annual cost synergies, in addition to increased revenues and tax synergies. Given the large job cuts since the deal was first announced, the cost synergies originally expected may no longer be available once the merger is completed.
As the production companies negotiate for better near-term pricing with the services sector, both must keep an eye on the long term, according to Wood Mackenzie:
Pushing the service sector too hard now is only likely to shore up problems once more attractive fundamentals return: Increasingly severe job cuts means that the industry is losing skilled resources that will take time to attract back when prices recover.
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The researchers do think that the industry can achieve cost savings of 20% to 30%, provided that it does not all come at the expense of the services sector:
Additional measures are needed to manage costs: re-working field development plans, optimising project design and more innovative approaches to project management will all play important parts.
Wood Mackenzie concludes:
A prolonged period of low oil prices over a number of years is likely needed to bring about profound, structural changes to industry costs. This is unlikely — in our view oil prices will begin to recover from 2017, and there is a real risk that cost inflation pressures then return. Stronger collaboration between operators and service companies will be key in driving efficient practices. The winners therefore are likely to be operators with a strong pipeline of near-term projects close to sanction which are able to take advantage of the trough in costs through 2015/16.
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