Each day crude prices remain weak, it puts the industry one step closer to a potential day of reckoning. In the near term, that reckoning could be with the industry's banks and credit investors, which are growing worried about the impact that low oil prices will have on the entire industry's ability to pay back debt. However, a bit further down the road is another potential day of reckoning for those outside the industry: It's a day when a world that's currently swimming in an abundance of oil could find itself well short of supply.
Drilling a hole
According to analysis from Houston-based energy investment bank Tudor, Pickering, Holt & Company, or TPH, the oil industry has deferred or canceled about 150 projects that could unlock 125 billion barrels of oil and gas over their lifetime. At peak production, these projects represent 19 million barrels of daily production, potentially leading to a big hole in future supplies given the combination of growing demand and shrinking legacy production, both of which are noted on the following chart from a presentation by Chevron (NYSE:CVX).
According to David Pursell, the head of macro research at TPH, "By not sanctioning projects today, you're putting a hole in production in 2017, 2018 and 2019 -- potentially a big hole." ExxonMobil (NYSE: XOM), for example, could delay up to 25 projects representing roughly 2.5 million barrels a day of capacity. In fact, Exxon has already significantly scaled back its spending in recent years, with spending expected to average around $34 billion over the next several years, which is well off its peak of $42.5 billion in 2013. What's important to note is the lag between that elevated spending level and the expected production ramp, which is going from 4 million barrels of oil equivalent per day (BOE/d) last year up to 4.3 million BOE/d by 2017. It's a number that could flatline -- or even fall -- in the future if ExxonMobil really pulls back the reins on spending by delaying those projects.
Counting the cost
The big factor in project delays is economics, with many projects simply not making economic sense at current prices. In fact, a new oil sands project can have a breakeven point upwards of $95 to $114 per barrel. Because of this cost, international oil giants such as Statoil (NYSE: STO) and Total (NYSE: TOT) have postponed projects until the economics make sense. Statoil, for example, decided to put a three-year pause on development of its 40,000-barrel-per-day Corner project when oil prices started to slide in September of 2014 because rising costs and limited pipeline capacity put the project's economics at risk. Meanwhile, even before crude took a dive Total suspended work on its nearly $10 billion Joslyn oil sands mine due to the troubling economics of that project.
Deepwater projects, likewise, can be just as costly, often requiring a $75 oil price, if not more. Chevron, for example, delayed its Rosebank North Sea development in November of 2013 -- when Brent crude was well above $100 per barrel -- saying that it did not "currently offer an economic value proposition" to justify the estimated $8 billion investment. That prohibitive price tag will likely keep Rosebank's estimated 240 million BOE underground for quite a few more years.
Big oil producers have significantly reduced spending on major projects, which could leave a big hole in future oil supplies. That said, these are pure economic decisions, with many of these projects still requiring triple-digit oil prices to justify the investments. So, either oil prices need to rebound or costs must come down before this oil will ever see the light of day. That said, the concern is that with so much oil staying underground that oil prices could significantly spike and stay elevated for a while because it would take years before these projects would deliver a drop of oil. The implication being that some producers might need to bite the bullet and begin work on a project that currently not economically rational in anticipation of prices improving in the future given the fact that supplies naturally decline if adequate investments aren't made to bring new supplies online.