Tuesday, March 22, 2016

Drillers can't replace lost output as $100 oil inheritance spent

HOUSTON (Bloomberg) -- For oil companies, the legacy of $100 crude is starting to run dry.

A wave of projects approved at the start of the decade, when oil traded near $100/bbl, has bolstered output for many producers, keeping cash flowing even as prices plummeted. Now, that the production boon is fading. In 2016, for the first time in years, drillers will add less oil from new fields than they lose to natural decline in old ones.

About 3 MMbopd will come from new projects this year, compared with 3.3 MMbopd lost from established fields, according to Oslo-based Rystad Energy AS. By 2017, the decline will outstrip new output by 1.2 MMbpd as investment cuts made during the oil rout start to take effect. That trend is expected to worsen.

“There will be some effect in 2018 and a very strong effect in 2020,” said Per Magnus Nysveen, Rystad’s head of analysis, adding that the market will re-balance this year. “Global demand and supply will balance very quickly because we’re seeing extended decline from producing fields.”

A lot of the new production is from deepwater fields that oil majors chose not to abandon after making initial investments, Nysveen said in a phone interview.

Royal Dutch Shell Plc is scheduled to start the Stones project in the Gulf of Mexico’s deepest oil field this year after approving it in May 2013. Benchmark Brent crude averaged $103/bbl that month compared with about $41 on Monday. Stones will add about 50,000 bopd to Gulf of Mexico output at a peak rate, according to Shell.

Two other deepwater projects, run by Noble Energy Inc. and Freeport-McMoran Inc., are due to commence this year, the U.S. Energy Information Administration said in a Feb. 18 report. Anadarko Petroleum Corp. started Heidelberg field in January.

That will help boost production in the Gulf of Mexico by 8.4% this year to a record annual average of 1.67 MMbopd, according to the U.S. Energy Information Administration.

Eni SpA, Italy’s largest oil company, started Goliat field in the Arctic this month and Shell began producing from a new area of the BC-10 project in Brazil on March 14. British driller Tullow Oil Plc plans to begin output from Tweneboa-Enyenra-Ntomme field offshore Ghana in July or August.

“There is a wide range of upstream projects coming online in 2016, and that is a function of the high levels of investment deployed back when we were in a $100/bbl world,” said Angus Rodger, a Singapore-based analyst at energy consulting firm Wood Mackenzie Ltd. “In the short term, they will generate far lower returns than originally envisaged.”

Yet, these developments won’t be enough to counter the natural decline in oil fields that are starting to suffer from lower investment. A little more than a year after Shell approved the Stones project in 2013, oil prices began their slump, with Brent dropping to a 12-year low below $28/bbl in January.

That has squeezed budgets of oil producers and project approvals have dwindled. From 2007 to 2013, companies took final investment decisions on an average 40 mid- to large-sized oil and gas projects a year, Wood Mackenzie’s Rodger said. That fell to below 15 in 2014 and to less than 10 last year. Neither Rodger nor Rystad’s Nysveen expect an upturn this year.

Project Approvals

Morgan Stanley estimates nine projects are in contention to get the green light this year, including BP’s Mad Dog Phase 2 in the Gulf of Mexico and Eni SpA’s Zohr gas field in Egypt. These are among 232 projects, excluding U.S. shale, awaiting approval following deferrals over the past two years, according to a Jan. 29 report.

Companies cut capital expenditure on oil and gas fields by 24% last year and will reduce that by another 17% in 2016, according to the International Energy Agency. That’s the first time since 1986 that spending will fall in two consecutive years, the agency said Feb. 22.

“We see oil investments are declining substantially,” IEA Executive Director Fatih Birol said in Berlin on March 17. “That we’ve never seen in the history of oil.”

Even after reducing costs for conventional projects by an average of about 15% last year, many still aren’t competitive, Wood Mackenzie’s Rodger said. Shell approved the Appomattox oil field in the Gulf of Mexico last year at a break-even oil price of $55/bbl, still above current market rates of $41.49/bbl at 6:19 a.m. in New York Tuesday.

“The industry has had a real reset, with costs coming down and break-even prices for projects falling,” said Brendan Warn, a managing director at BMO Capital Markets in London, said by phone. “But costs will have to come down further.”


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