Plunging oil prices have rendered more than a trillion dollars of future spending on energy projects uneconomic, according to a study that suggests that the impact on industry operators is worsening.
A report published Monday says $1.5 trillion of potential investment globally – including in North America’s shale-producing heartlands – is “out of the money” at current oil prices close to $50 a barrel and unlikely to go ahead.
Industry operators expect capital spending on new projects to decline by between 20 and 30 per cent on average in the wake of the price slide, says Wood Mackenzie, the energy consultancy.
It calculates that $220 billion of investment has been cut so far, about $20 billion more than it estimated two months ago and much of it the result of projects being deferred. Such a decline in spending means that the price crash since last summer – the result of weaker Chinese demand, record US production and Saudi Arabia’s decision not to cut output – could resemble the savage downturn of the mid-1980s.
After a brief recovery in the spring, oil prices spiraled lower in July. Brent crude – the global benchmark – fell to its lowest point in more than six years during August’s wider market turmoil. It now stands at $47.47 a barrel, down from $115 in June last year.
Just half a dozen new projects will be approved this year, says the Wood Mac report, and 10 or 11 in 2016, compared with an annual average of 50 to 60.
Onshore US producers, including the “fracking” industry, which has unlocked previously hard-to-access reserves, have reacted fastest to the market collapse. “Deep cuts” in North America account for more than half of a 45 per cent fall in capital spending across the Americas.
“The flexibility to rapidly dial back investment in unconventionals at low prices has provided a competitive advantage for the US independents with the bigger positions,” the study says.
“Majors and international players lack exposure to this flexible investment.”
Among the hardest hit companies will be oilfield service suppliers, the contractors which provide thousands of workers and equipment such as drilling rigs to the majors. “This will have a massive impact on the service sector.”