Oil Megaprojects Won’t Stay On The Shelf For Long
For years, as conventional oil reserves depleted and became increasingly hard to find, oil companies ventured into far-flung locales to find new sources of production. Extracting oil from these frontier areas required more advanced technology and a lot more capital: Ultra deepwater, Arctic offshore, heavy oil sands, and increasingly, the Lower Tertiary.
Often these megaprojects projects were only the purview of the largest oil companies, as smaller players did not have the resources – financial or technological – to make them work. Meanwhile, smaller drillers, at least in North America, turned to shale, which required less upfront cash and could be turned around on a quick timetable.
The collapse of oil prices, however, could kill off the megaproject. The oil majors are scrambling to cut costs, and large-scale projects with high costs and long time-horizons are not making the cut. A combined $19 billion in write-downs was recorded in the last week of October as the oil industry reported third quarter earnings.
Spending on deepwater exploration is expected to be cut 20 to 25 percent industry-wide, according to Barclays, substantially higher than the 3 to 8 percent cut for exploration on all varieties of fields.
One problem for these large projects is chronic delays and ballooning costs. Around 80 percent of large projects fail to stay on budget and come online at the expected start date, according to Bloomberg. About three-quarters of them have suffered delays, and two-thirds have blown through their original cost expectations.
That could force even the oil majors to start to back away from large-scale oil projects. Royal Dutch Shell recently scrapped its Arctic program and wrote off a costly oil sands asset at Carmon Creek. The completion of Chevron’s Big Foot project in the Gulf of Mexico will be pushed back by a few years because of equipment problems.
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