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Petroleum sector risks $210 billion cost cuts

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The upstream sector of the oil and gas industry could be hit harder in the current dilemma facing the industry as deeper cuts hovering around $210 billion is being considered in the sector.

A global resources consultancy, Wood Mackenzie in a latest report noted that almost all pre-FID projects would be deferred, adding that of the 50+ projects identified with potential to go ahead this year, only 10 have a chance of proceeding, though all are at risk.

Wood Mackenzie’s upstream research team, Rob Morris, disclosed that about $110 billion of investment would be deferred across the world, with another $100 billion at risk.

“New committed investment could be as low as US$22 billion if only the most advantaged projects progress,” he stated.

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Morris disclosed that corporate balance sheet strength and strategic drivers would be much more important than project economics.
According to him, only companies with the strongest balance sheets will even contemplate major project FIDs.
Morris said: “The Majors and certain NOCs will take the lead, while projects with financially stretched partners and at the higher end of the cost curve will struggle.

“Five years of cost-cutting and optimisation means more than half of 2020’s pre-FID projects generate 15 per cent returns at $50/bbl. In 2015, less than half of pre-FID projects generated 15 per cent at $85/bbl and almost none were economic below $50/bbl.”

He noted that projects, which have clear strategic drivers, robust economics and operators with strong balance sheets are advantaged.
To him, advantaged deepwater oil in places like Guyana and Brazil, along with niche LNG – including low-cost greenfield and feedgas backfill at legacy liquefaction projects progress.

Morris said: “Two-thirds of all greenfield projects, representing US$110 billion of total future investment, face almost certain deferral.

“Some project sanctions will be delayed to 2021 and beyond. Some will be completely reworked or even put on hold permanently. These include projects with weaker strategic drivers, high breakevens, and/or financially distressed operators.

“Africa, the North Sea, south-east Asia and Australian LNG face mass project deferrals. Australian LNG is perhaps the most high-profile casualty. As we predicted, both Woodside Petroleum and Santos have already announced delays at Scarborough and Barossa until market conditions improve.

“Project deferrals now will mean huge volumes of pre-FID production at risk from the mid-2020s. Projects previously targeting a 2020 FID would have contributed 1.8 million barrels per day of liquids and nearly 20 billion cubic feet per day of production.”

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