Future oil and gas investments of $930 billion could be at risk of cancellation due to low oil prices, according to analysts at Goldman Sachs. In its Top 400 analysis of the world’s largest new oil and gas fields, Goldman Sachs found that pre-sanction fields that are uneconomic at $70/barrel Brent crude represent 2.3 million barrels per day (bpd) of 2020 production and 7.5 million bpd of 2025 production, or three percent and eight percent of current global oil demand.
These future investments include shale developments, where the concept of pre-sanction/post-sanction is more blurred, according to the Dec. 15 research note. “In order to bring these projects back into profitable territory at $70/barrel Brent, costs would need to come down by 20 percent to 30 percent,” said Goldman Sachs analysts. “This is consistent with our view that CAPEX needs to come down by around 30 percent for Big Oils in order to restore an acceptable level of free cash flow generation (4.5 percent free cash flow yield, in line with the long-term average) at $70/barrel Brent.” Goldman Sachs found that less than one third of the Top 400 cost curve is profitable at current oil prices.
The environment of project deferral and cost deflation will be extremely challenging for oil service providers, especially capital-intensive companies that require high asset utilization, such as drillers, subsea construction and seismic. Oil prices have sunk in recent months due to concerns that global oil supplies will outweigh sluggish demand growth. U.S. oil prices brought a four-session losing streak Tuesday after posting big swings earlier in trading, but few traders believe the recent strength in the oil market suggests a sustained rebound, the Wall Street Journal reported Tuesday.