The Other Side of Low Oil Prices: Fewer Exploration and Pipeline Projects

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With oil hovering around $70 a barrel, oil and gas companies must make decisions on 800 proposed projects worth a total of $500 billion. An oil analyst told Reuters that up to $150 billion worth of the those projects might not be built because of the low oil prices.  Some projects require higher energy prices to be cost effective.

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Oil companies are trying to access more complex and hard to reach fields located in some cases deep under the sea, but the cost of production has risen sharply, and given the rising cost of raw materials and the need for expensive new technology to reach the oil, many projects are simply no longer feasible. The price of oil has plunged by 40% in the last 5 months to around $70 a barrel.

The heavy and civil engineering construction segment, which includes oil drilling and transportation projects, was one of only 2 US construction market sectors that actually lost jobs (1,300 of them) in November, but it’s not just US projects at risk of low-price cancellation. Chevron‘s Rosebank project in the North Sea has already been delayed for several years and, in response to a question about its future, Chevron said it was still too early in design to determine if it was feasible and cost-effective.

Norway’s Statoil this week said it had postponed until next October, a 6-month delay, a decision to invest $5.74 billion in the Snorre field in the Norwegian Sea as its profitability was under threat.

The projects most at-risk, however, are the ones who involve expensive extraction of oil from Canada’s tar sands. This includes TransCanada‘s proposed Keystone XL pipeline.

Royal Dutch Shell‘s liquefied natural gas project in British Columbia, already under pressure from a looming supply surge, faces further strain in the current price environment, analysts told Reuters. The project likely requires oil at $80 a barrel to break even.

Royal Dutch Shell’s chief financial officer Henry Simon indicated in October that it was “less likely” to go ahead with unconventional projects in West Canada if oil falls below $80 a barrel.

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