US$210bn of new spend in firing line as players target cost cuts
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The oil price crash has hit the upstream sector hard. Deep cuts are being made across the board, but it will have a dramatic impact on the industry’s project pipeline.
Global natural resources consultancy Wood Mackenzie believes almost all pre-FID projects will be deferred. Of the 50+ projects we identified with potential to go ahead this year, only 10 have a chance of proceeding, but all are at risk.
Rob Morris, from Wood Mackenzie’s upstream research team, said: “US$110 billion of investment will almost certainly be deferred, with another US$100 billion at risk.
“New committed investment could be as low as US$22 billion if only the most advantaged projects progress.”
He added: “Corporate balance sheet strength and strategic drivers are much more important than project economics.
“Only those with the strongest balance sheets will even contemplate major project FIDs.
“The Majors and certain NOCs will take the lead, while projects with financially stretched partners and at the higher end of the cost curve will struggle.
“Five years of cost-cutting and optimisation means more than half of 2020’s pre-FID projects generate 15% returns at US$50/bbl. In 2015, less than half of pre-FID projects generated 15% at US$85/bbl and almost none were economic below US$50/bbl.”
Projects which have clear strategic drivers, robust economics and operators with strong balance sheets are advantaged.
Deepwater oil and LNG dominate the list.
Advantaged deepwater oil in places like Guyana and Brazil, along with niche LNG – including low-cost greenfield and feedgas backfill at legacy liquefaction projects – will progress.
Morris said: “Two-thirds of all greenfield projects, representing US$110 billion of total future investment, face almost certain deferral.
“Some project sanctions will be delayed to 2021 and beyond. Some will be completely reworked or even put on hold permanently. These include projects with weaker strategic drivers, high breakevens, and/or financially distressed operators.
“Africa, the North Sea, south-east Asia and Australian LNG face mass project deferrals. Australian LNG is perhaps the most high-profile casualty. As we predicted, both Woodside Petroleum and Santos have already announced delays at Scarborough and Barossa until market conditions improve.
“Project deferrals now will mean huge volumes of pre-FID production at risk from the mid-2020s. Projects previously targeting a 2020 FID would have contributed 1.8 million barrels per day of liquids and nearly 20 billion cubic feet per day of production.”