TPH: Canceled projects could draw down 19 million daily oil barrels

HOUSTON — Blindsided by a brutal downturn, oil companies have scuttled plans for scores of costly energy projects in an industry-wide retreat that could wipe out 19 million barrels from the world’s daily regimen of hydrocarbons over the next few years, a new report says.

Oil companies have canceled or delayed final investment decisions on about 150 projects that are tied to 125 billion barrels of oil equivalent, which could stay underground for several years longer than expected amid a steep drop in crude prices, energy investment bank Tudor, Pickering, Holt & Co. said Tuesday.

“By not sanctioning projects today, you’re putting a hole in production in 2017, 2018 and 2019 — potentially a big hole,” said David Pursell, head of macro research at Houston energy investment bank Tudor, Pickering, Holt & Co.

Analysts had expected U.S. oil production, which is down by 500,000 barrels from its peak in April, to drop more rapidly than it has this year and help crude prices recover quickly from multi-year lows.

But one of the lessons of the year-long price slump has been that if crude prices stay low long enough, other sources of crude will have to share in the global output decline that’s expected to eventually put oil supply and demand back into balance. Outside of the 13-member Organization of Petroleum Exporting Countries, all kinds of crude production are at risk when Big Oil is forced to weigh investment returns against scenarios in which crude prices remain depressed for years.

The U.S. Energy Information Administration believes the harvest of liquid fuels in non-OPEC countries like Russia and the United States is going to sink in the fourth quarter of 2015, the first absolute decline since mid-2011. Non-OPEC production growth is expected to sink by 520,000 barrels a day — its lowest point next year — in the first quarter of 2016.

“It’s really about how long are we down at these (oil price) levels, because the longer you’re down here, every month or two it just puts more stress on the balance sheets,” said Pearce Hammond, an analyst at Simmons & Company International.

Tudor Pickering projects about 3 million barrels of the industry’s deferred daily production will come from Canadian oil sands projects, among the industry’s most expensive prospects, because the viscous crude is too thick to move easily underground. Another 5 million barrels will likely be delayed in war-torn Iraq and Kurdistan, where the regional government has previously failed to make payments to the western oil companies that drill into reservoirs there.

Elsewhere, in Mozambique, Australia and Canada, progress on liquefied natural gas plants has been slow. Tudor Pickering expects 20 billion cubic feet a day of LNG production capacity will be deferred as Big Oil delays plans on 20 projects. “Virtually all (LNG) project sanction decisions outside of the U.S. have been pushed back,” the investment bank said.

Canada and Norway topped the investment bank’s list of deferred projects by country. A “surprisingly” few deep-water projects have been deferred in the Gulf of Mexico and Brazil, Tudor Pickering said, but the industry has shelved plans for more deep-water ventures in Angola and Nigeria, which were in trouble even before oil prices fell, because of unattractive terms offered by the Angolan government and fiscal issues in Nigeria. In terms of daily production, about 6 million barrels buried in the earth’s deepest depths will remain there for longer than oil companies intended.

The International Energy Agency estimates it costs $95 to $114 a barrel to pull up a barrel of Canadian oil sands and $59 to $90 a barrel in the U.S. shale plays. Deep-water projects cost $60 to $75 a barrel in West Africa and $38 to $65 a barrel in Brazil. Meanwhile, Saudi Arabia and Iraq can pump oil for $9 to $14 a barrel. Both OPEC countries have pumped record amounts of crude this year.

All told, the industry has scrapped about $125 billion in annual capital spending plans over the next five years, assuming just half of the projects would have been sanctioned if the oil market hadn’t crashed over the last 18 months. That leaves oil companies several years to catch up on building the production equipment and infrastructure they need to bring their buried oil to market.

“Even when prices come back, U.S. production will certainly rebound after a period of time, but it’s the rest of non-OPEC that could be structurally impaired for a while,” Pursell said.

For the world’s biggest publicly traded oil companies, the huge scale of the delays “suggests that companies will have real growth issues toward the end of the decade,” and some will have to buy smaller rivals to make up for it, the investment bank said. Big Oil companies account for a third of the 150 projects Tudor Pickering says have been delayed or canceled.

BP and Chevron have deferred the largest number of projects while Exxon Mobil Corp. could delay the most oil barrels, about 2.5 million barrels a day of production capacity from 25 projects. That’s about two thirds the amount the Irving oil giant currently produces. Royal Dutch Shell is next, deferring 1.7 million barrels of oil a day, but its deal to buy BG Group this year has alleviated many of the growth issues it might face in coming years. BG Group has a big stake in Brazil’s deep-water fields.

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