Oil industry to cut $1 trillion in spending after price slump

Business Wednesday 15/June/2016 14:14 PM
By: Times News Service
Oil industry to cut $1 trillion in spending after price slump

London: 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.
Worldwide investment in the development of oil and gas resources from 2015 to 2020 will be 22 per cent, or $740 billion, lower than anticipated before prices plunged in 2014, with the deepest cuts in the US, Wood Mackenzie said in a report on Wednesday. A further $300 billion will be eliminated from exploration spending. Global production this year will be three per cent lower than previously forecast, the consultant said.
"The impact of falling oil prices on global upstream development spend has been enormous,” Malcolm Dickson, principal analyst at Wood Mackenzie, said in the report. “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 Organisation of Petroleum Exporting Countries’ (Opec) 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 per cent 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 report.
The Middle East is the region least affected, with no drop in investment expected in Saudi Arabia — the world’s largest crude exporter — for this year and next. That’s because several countries in the region are spending to maintain their market share, the report said.
The investment cuts are taking a toll on production. Compared with expectations before the slide in oil prices, output this year will be five million barrels of oil equivalent a day lower, with the deficit widening to six 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 per cent reduction in investment in dollar terms anticipated over the next two years is due in large part to the depreciation of the rouble, it said.
“For now, the select few projects that are progressed will do so because costs have been cut substantially,” Dickson said. “Kick-starting the next investment cycle will require more cost deflation” and confidence in higher prices.