Oil industry to slash $1tr in spending

The oil and gas industry will cut $1 trillion from planned spending on exploration and development because of the slump in prices, leading to slower growth in production, according to consultant Wood Mackenzie Ltd.
Worldwide investment in the development of oil and gas resources from 2015 to 2020 will be 22 percent, or $740 billion, lower than anticipated before prices plunged in 2014, with the deepest cuts in the US, Wood Mackenzie said in a statement Wednesday. A further $300 billion will be eliminated from exploration spending. Global production this year will be 3 percent lower than previously forecast, the consultant said.
“The impact of falling oil prices on global upstream development spending has been enormous,” Malcolm Dickson, principal analyst at Wood Mackenzie, said in the statement. 
“Companies have responded to the fall by deferring or canceling projects” in virtually every oil-producing country, he said.
A global supply glut caused by the increase in shale oil production in the US, coupled with the Organization of Petroleum Exporting Countries’ decision to keep pumping to preserve market share, triggered a collapse in oil prices in 2014. While Brent crude, the international benchmark, has rebounded more than 75 percent from a 12-year low in January, the current price of about $49 a barrel is still less than half the level two years ago.

Drilling decline
The US has experienced the steepest cuts in spending. Forecast capital investment there is down by half for this year and next, a drop of around $125 billion, mainly due to a decline in drilling, Dickson said in the statement.
The Middle East is the region least affected, with no drop in investment expected in Saudi Arabia for this year and next. That’s because several countries in the region are spending to maintain their market share, Wood Mackenzie said.
The investment cuts are taking a toll on production. Compared with expectations before the slide in oil prices, output this year will be 5 million barrels of oil equivalent a day lower, with the deficit widening to 6 million next year, Wood Mackenzie estimates.
Part of the reduction in spending stems from a drop in the cost of doing business. Costs in the US unconventional oil and gas industry were a quarter lower on average compared with their peak in 2014, Wood Mackenzie said. In Russia, the 40 percent reduction in investment in dollar terms anticipated over the next two years is due in large part to the depreciation of the ruble, it said.
Wood Mackenzie’s forecasts stand in contrast to Goldman Sachs Group Inc.’s views. The Wall Street bank said signs are emerging that companies “appear ready to start sanctioning projects again after an 18-month hiatus,” amid recovering oil prices. These companies are competing for capital needed to fund such projects, it said.
“For now, the select few projects that are progressed will do so because costs have been cut substantially,” Wood Mackenzie’s Dickson said. 
“Kick-starting the next investment cycle will require more cost deflation” and confidence in higher prices, he said.

Source: Arab News