Report: Shale Vulnerable to Short-Term Investment Cuts Versus Deepwater

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Companies with flexible financing may choose US deepwater project investment opportunities over US shale in the near-term, according to a recent report.

U.S. shale projects may be vulnerable to short-term investment cuts in relation to deepwater projects, according to a Dec. 9 report by petroleum investment advisor Gaffney, Cline & Associates (GCA).

Oil and gas companies are facing reduced cash flow in 2015 due to the recent decline in oil prices to a five-year low. That dip has been blamed on reduced demand and global oversupply, with much of the oil production oversupply coming from U.S. unconventional production. As a result, companies will be scaling back or reprioritizing their spending.

However, recent analysis by GCA indicates shale activity will most likely suffer investment cuts first due to low oil prices, leaving the deepwater Gulf of Mexico and other deepwater plays relatively more protected.

Strong offshore Gulf of Mexico projects can be still viable down the $60/barrel, said paper co-authors Cecilia Jing Cui and Neil Abdalla. Although pain is likely for areas like the offshore Gulf of Mexico in 2015, it should be much better placed to weather the storm of depressed oil prices in the short-term than the U.S. onshore unconventional industry, said Bob George, executive director and senior strategic advisor at GCA.

“Whilst high cost environments such as the deepwater Gulf of Mexico would appear to be vulnerable, and undeniably cuts should be expected there, economic rationality suggests that the brunt of cuts should be directed at onshore unconventional investments,” said George. “However, in the short-term there is not always the operational flexibility to make decisions based solely on fundamentals.”

While shale operators can cut back or ramp up shale drilling in more rapid response to fluctuating oil prices, deepwater projects have a longer-term investment cycle, with investments of $1 billion or more and a five-year timeline before returns are seen, said George.

Deepwater projects already underway are less likely to be halted due to low oil prices, but the expected price of oil in 2020 poses a risk for deepwater projects.


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