A recent update of Wood Mackenzie’s July 2015 market analysis hints at what’s next for the oil and gas market.
Key takeaways from the report include:
- $380 billion in total project capex deferred (in real terms) from 68 oil and gas projects worldwide, with just under half of that deferred capex ($170 billion) occurring from 2016 to 2020.
- Deepwater will be hit hardest, with 29 deferrals representing 62% of total deferred reserves and 56% of total capex.
- 2.9 million bpd of liquid production will be deferred to early next decade, up from 2 million bpd.
- Oil is the most affected, with deferred liquid volumes up 44% versus 24% for gas.
- The average breakeven oil price for delayed greenfield projects is $62 bbl.
Wood Mackenzie’s Angus Rodger noted in the report that “one reason we are seeing a growing list of delayed projects is cost deflation … the need for costs to fall more to stimulate investment. That accounts for the highest number of development delays in deepwater…”
In the Jan. 11 issue of IHS Energy’s Strategic Horizons, Harshal Parikh identified several key cost reductions that might promote a healthy recovery for companies that weather the current crisis. Among these are steel, drilling rig and subsea equipment costs.
“Steel prices have been trending downward since 2011, with price declines accelerating in the third quarter of 2015 (down 7% versus the previous quarter). The larger than anticipated quarterly fall in steel prices was due to lower global demand and overproduction by China. IHS’s steel pricing and purchasing team does not expect the steel supply/demand imbalance to be solved in the near future.”
The report said that since 2012, day rates for ultradeepwater rigs (over 5,000') have fallen by approximately 35% while day rates for deepwater rigs (over 1,000') are 28% lower than the fourth quarter of 2014.
The offshore service vessel industry has been particularly hard hit. Day rates for smaller vessels (less than 2,000 dwt) have fallen by about 50% in the last year, with larger vessels dropping 23% to 45%, depending on size and capability, in the same period.
Cost deflation is depressing, but the bottom line, analysts say, is that costs must fall even more in this low oil price environment to create incentives to invest again.