Oil-related projects in North America worth roughly around $1.5 trillion are now considered uneconomic and are unlikely to be brought online, according to a report published Monday by consultant Wood Mackenzie.
Oil producers are targeting cost cuts of roughly 20%-30% due to the biggest slump in oil prices since the 1980s, but they also have slashed investment programs and defer projects that remain too expensive at crude’s current price level of around $50 a barrel.
Spending is down by $220 billion for 2015 and 2016, compared with Wood Mackenzie’s pre-oil-price-crash projections, Kallanish Energy finds. Much of the drop in spending has been focused on projects onshore North America.
“Additional measures are needed to manage costs,” said James Webb, Wood Mackenzie’s Upstream research manager, warning that simply squeezing the service sector won’t be sufficient to meet the industry’s cost-reduction goals. The consultancy said most new oil projects remain uneconomic.
Wood Mackenzie estimates supply-chain savings through squeezing the service sector will result in an average cost reduction of just 10%-15% — half what the industry is hoping to achieve. To cut costs sharply, the sector needs to rethink the way it approaches projects, many of which were already expensive when oil was $100/Bbl.
“A prolonged period of low oil prices over years is likely needed to bring about profound, structural changes to industry costs,” said Webb. “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.”
Webb added he believes oil prices will begin to recover from 2017 forward, and there is a risk, cost inflation pressures then return.
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