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Energy groups delay $380 billion investment in oil projects

Falling oil prices and reduced budgets have forced energy companies to delay 68 projects worth $380 billion since the oil price crash in 2014, a new study on the impact of low oil prices has found.15 Jan 2016

Energy consultancy Wood Mackenzie said that deepwater projects have been hit hardest by the oil price and account for over half of the total deferred projects.

Angus Rodger, principal analyst for upstream research for Wood Mackenzie, said: "The impact of lower oil prices on company plans has been brutal. What began in late-2014 as a haircut to discretionary spend on exploration and pre-development projects has become a full surgical operation to cut out all non-essential operational and capital expenditure. Tumbling prices and reduced budgets have forced companies to review and delay final investment decisions (FID) on planned projects, to re-consider the most cost-effective path to commerciality and free-up the capital just to survive at low prices."

"For all 68 projects there are multiple elements contributing to delay. Price is rarely the only factor slowing down FID - but it has exerted the strongest influence," Rodger said.

Delayed spend from the 68 projects from 2016 to 2020 totals $170bn, Wood Mackenzie said.

Wood Mackenzie now believes that 2.9 million barrels a day of liquid production has been deferred to early next decade, up from its 2 million barrels a day prediction in mid 2015.

Oil accounts for 44% of the total deferred liquid volumes, with 24% of that total being gas.

"One reason we are seeing a growing list of delayed projects is cost deflation – or to be more accurate the need for costs to fall more to stimulate investment," Rodger said.

"The biggest jump in pre-FID delayed projects over the last six months was in the deepwater, rising from 17 to 29, where costs have only fallen by around 10% despite the global crash in rig day-rates. Despite the size of these fields, the combination of insufficient cost deflation and significant upfront capital spend has discouraged companies from greenfield investment in the sector," he said.

Companies have brought in stricter investment criteria over the past six months, Tom Ellacott, Wood Mackenzie's vice president of corporate analysis, said.

"We believe that most companies will now be looking for these developments to hit economic hurdle rates at around $60 a barrel," Ellacott said. "Tougher capital allocation criteria will give companies the framework to make difficult decisions about restructuring portfolios, optimising pre-FID projects and capturing the full benefits of cost deflation."

Rodger said that the countries with the largest inventory of delayed oil projects are Canada, Angola, Kazakhstan, Nigeria, Norway and the US, which together "hold nearly 90% of all deferred liquids reserves". He said this includes oil sands, onshore, shallow-water and deepwater assets in both greenfield and incremental developments.

"Those with the largest gas reserves are Mozambique, Australia, Malaysia and Indonesia, which combined hold 85% of the total volume. The majority of this gas is found offshore, primarily in deepwater locations, and requires complex and expensive development solutions," Rodger said.