Low investment, reserves as threat to oil, gas future

As prices continued to remain low, the oil and gas industry has slashed its capital spending by about 50 per cent in 2015 and 2016, risking future availability of supplies.

This has remained a source of worry for experts who believed that with the rate of capital expenditure (capex) reduction in the industry, the sector may not be able to tackle to challenges of crude oil demand in the nearest future.

An estimated $380 billion worth of oil and gas projects have been cancelled since 2014, according to a new estimate from Wood Mackenzie.

“Against a backdrop of overwhelming corporate pressure to free-up capital and reduce future spend – to the detriment of production growth – there is considerable scope for this wall of output to get pushed back further if prices do not recover and/or costs do not fall enough,” the Wood Mackenzie said in a report on oil and gas investment.

In Nigeria, there has not been major investment in exploration activities in the Nigeria oil and gas sector.

The Nigeria National Petroleum Corporation (NNPC) Group Managing Director, Maikanti Baru, and President of Nigerian National Association of Petroleum Explorationists (NAPE), Nosa Omorodion raised the alarm recently over the depleting state of the country’s oil reserves.

Specifically, Omorodion warned that the country’s reserves may dry up in 30 years if nothing is done to boost it.

Analysing investment activities in the oil industry, Deloitte said over the next five years, about $590 billion of the industry’s debt is maturing, and shareholders will expect about $600 billion in already reduced payouts.

This, it noted, takes up total cash-flow obligations of integrated oil companies (IOCs), listed national oil companies (NOCs), and independent E&P companies to more than $4 trillion from 2016 to 2020.

According to Deloitte in its analysis of the oil industry, this lower-for-longer price environment will challenge Exploration and Production (E&P) companies to achieve full reserve replacement, especially considering capex is not their only priority.

It noted that because of capex reduction, or underinvestment, the industry would quickly dip into its existing non-OPEC, convenient resources.

While this strategy would help sustain production without over-burdening cash flows in the near term, Deloitte noted that it is going to leave high-cost and/or riskier barrels for the future.

Although oil prices have recovered to about $50 a barrel, Deloitte said that the industry’s capex cycle would take time to stabilise and recover in this lower-for-longer price environment.

“It takes significant capital for the industry to just remain flat. Actual and announced capital expenditure (capex) cuts suggest that even remaining flat could be a challenge for the industry, let alone meeting any expected growth,” said John England, vice chairman, Deloitte LLP, and U.S. and Americas oil and gas leader.

“Although oil prices have recovered to about $50 per barrel, the industry’s capex cycle will take time to stabilise and recover. Even in a weak demand and reduced costs outlook, we estimate the global upstream industry will need to spend a minimum capex of about $3 trillion during 2016 to 2020 to ensure its long-term sustainability.”

“Such hge outflows raise a question as to whether upstream business will generate enough cash, and where capex will figure in the priority order of companies,” said Andrew Slaughter, executive director, Deloitte Center for Energy Solutions. “When we annualised operating cash flows of all the three company sets in 2015 for the next five years, assuming a $55 per barrel average oil price, we see a total funding gap of up to $2 trillion from operations.”

Sounding a note of warning, the International Energy Information Administration (IEA) said that oil discoveries have slumped to the lowest level since 1952 and the global economy is becoming dangerously reliant on crude supply from political hotspots.

EIA said that investment in oil and gas projects has fallen from $780 billion to $450 billion over the last two years in an unprecedented collapse, and there is no sign yet of a recovery next year.

It noted that drillers are not finding enough oil to replace these barrels, preparing the ground for an oil price spike in the future and raising serious questions about energy security.