Energy sector may need more than belt-tightening to survive in new economic environment in which $50 oil could become the benchmark.
Operators need to chop between 20 percent 30 percent on new projects, trimming budgets throughout the supply chain and services sector – double what analysts say must be squeezed out on average.
Instead of focusing on cuts, operators must delve into project optimization, efficiencies and smarter ways of doing more with less. Wood Mackenzie’s analysis estimates that $1.5 trillion of uncommitted spending on new conventional projects and North American unconventional oil is uneconomic at $50 per barrel.
Investment in the upstream is actually down by $220 billion in 2015 and 2016, compared to pre-oil price crash projections. A reduction of 46 onshore North American projects have been deferred.
“We estimate that as much as $1.5 trillion of investment spend destined for new (pre-sanctioned) and U.S. tight oil projects is now out of the money, or in the starter terms, uneconomic at a $50 oil price,” said James Webb, upstream research manager for Wood Mackenzie, in a statement.
The implications of this level of reduced investments is significant for the industry’s sector service, which traditionally accommodated between 40 and 50 new projects a year, analyst Obo Idornigie said in a statement.
“We expect just six new projects to go ahead in 2015 and around 10 in 2016,” he added.
During this period of profound volatility, prices for raw materials, including oil and gas, have watched markets shed as much as $2.05 trillion, according to data compiled by Bloomberg. The energy sector has been hit the hardest, Donald Selkin, chief market strategist at National Securities Corp. in New York, told Rigzone.
“The problem is their ability to pay dividends,” he said. “That’s the question, as far as the valuation is concerned.”
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