Global upstream investment slashed by US$1 trillion

Global upstream capital spend from 2015 out to 2020 has been reduced by 22% or US$740 billion. When we include cuts to conventional exploration investment, the figure increases to just over US$1 trillion. The impact of the drop in oil prices on global upstream development spend has been enormous. Companies have responded to the fall by deferring or cancelling projects.

Has the rebound in oil price led the way for a wider recovery across the board or do signs point to further reductions to come?

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It's been two years since the dramatic fall in oil prices and there has been huge impact on upstream development investment. Virtually every oil producing country has seen cuts, with the US onshore particularly affected. The Middle East faces fewer spending cuts and projects are progressing in order to maintain market share but fiscal balances there are deteriorating. Our infographic, Surviving the low oil price in the Middle East, looks at fiscal pressures in the region including breakevens and high public spending.

In North Africa, major gas developments such as Eni's Zohr underpin investment despite deep cuts elsewhere throughout the region. BP's West Nile Delta project in Egypt will push ahead and deferrals on other Mediterranean projects have helped free up cash to fund the development.

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Which cuts are the deepest?

US Lower 48 have seen the quickest and deepest cuts, with the most dramatic impact on the US unconventional sector. Over half of the capex spend (US $125 billion)has been cut from 2016-2017, and over US $200 billion further cuts are expected out to 2020.

Russia has seen a large drop off, with investment down by 40% over the next two years - but much of this is due to the rouble depreciating against the dollar. Russia is keen to maintain its production and to do that it needs to keep drilling. In March 2016, the country reached yet another post-Soviet liquids production record of 10.9 mmbbl/d.

The mature North Sea has also been hit hard, with investment essential to maximise economic recovery and avoid early decommissioning. We've seen cuts of 36% or US $27.5 billion in the UK and Norwegian sectors since late 2014. In the UK we expect at least 140 fields to cease production over the next 5 years, with a total of US$78 billion (real terms) to be spent on decommissioning the UK Continental Shelf. Mission decommission: the North Sea looks at what's to become of this mature area.

Conventional exploration investment for 2015-2020 is US $300 billion less than we would have expected in 2014.

Andy Latham

Andrew LathamDr Andrew Latham, Vice President of exploration research says, "Although exploration investment has more than halved since 2014, and the figure is expected to be around US $42 billion per annum for 2016 and the same in 2017, costs have not been cut as much and as quickly as we expected. Some deepwater exploration spend has been protected by long rig contracts, but as these unwind we expect sharper cuts than in non-deepwater."

Is there a bright side?

A more positive note for operators shows that cost deflation has played a major role in capital spend. For example, the US unconventional sector reduced costs by 25% on average in 2015. Using our proprietary Global Economic Model, we've modelled expectations to 2016 to yield another 10%.

What's next?

Projects that are progressed will be due to substantial cost cuts. But we'll need more cost deflation and project scope optimisation along with confidence in higher prices and additional fiscal incentives to kick-start the next investment cycle.

We expect to see further reductions throughout the year, with investment levels shrinking as more projects are dropped and companies struggle to breakeven. Stay tuned for our in-depth series of regional capex cuts, looking at Europe and the North Sea.

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ReportFull analysis on capex reductions in US Lower 48, North Sea & Europe, Deepwater GoM, Asia Pacific, Latin America, Sub Saharan Africa, Russia & Caspian and Middle East & North Africa.

ReportRead our media release: Global upstream spend slashed by US$1 trillion since the oil price drop

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