If oil is below $50 a barrel, $1.5 trillion worth of oil projects will lose money

Oil drillers are deadlocked.

According to a report Monday from Wood Mackenzie, the energy and mining consultancy, the upstream oil and gas sector (involved in exploration and production) needs to find ways to spend less and hope that oil prices rebound soon.

Otherwise, a whole bunch of projects slated to be undertaken are going to be money losers.

From the report:

“In order to ensure projects are economically viable, operators will also need to focus on project optimization and adopt smarter ways of working with the service sector. Illustrating the need to reduce costs in the industry, Wood Mackenzie’s analysis estimates that $US1.5 trillion of uncommitted spend on new conventional projects and North American unconventional oil is uneconomic at $US50 a barrel.”

What the report says is that not only are the cuts insufficient, the current level of oil prices cannot earn them a decent return on any investments they make right now.

After oil prices crashed in 2014, the only option oil drillers had was to find ways to cut costs by first removing the most inefficient parts of their businesses. That included taking hundreds of oil rigs offline and laying off thousands of workers.

And then the companies cut capital expenditures on what remained.

Wood Mackenzie again:

“As the upstream industry responds to the low oil price, investment is down $US220 billion in 2015 and 2016 compared with our pre-oil price crash projections. In addition to reduced activity onshore North America, a total of 46 projects have been deferred as a result of the oil price fall. We estimate that as much as $US1.5 trillion of investment spend destined for new (pre-sanctioned) and US tight oil projects is now out of the money, or in starker terms, uneconomic at a $US50 oil price. This spend is very much at risk.”

And so in other words, this money probably won’t be spent at all unless oil comes back in a big way.

West Texas Intermediate crude oil was last at $US50 per barrel in mid-July and on Monday was up 3% to trade around $US46.40 a barrel.

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