• Sunday, July 14, 2024
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BusinessDay

Bankers see $1trn of zombie investments stranded in oil fields

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After crude prices dropped 49 percent in six months, oil projects planned for next year are the undead – still standing upright, but with little hope of a productive future. These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela.

In a stunning analysis, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields – excluding US shale – and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the US, the shale-oil party isn’t over yet, but zombies are beginning to crash it.

If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8 percent of current global demand.
It is not clear yet how far OPEC is willing to let prices slide.

The UAE’s energy minister said on December 14 that OPEC wouldn’t trim production even if prices fall to $40 a barrel.
An all-out price war could take up to 18 months to play out, said Kevin Book, managing director at ClearView Energy Partners LLC, a financial research group in Washington.
If cheap oil continues, it could be a major setback for the US oil boom.

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift.

In 2015 year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy.

If the price of oil averages $70 in 2015, he wrote, $150 billion will be pulled from oil and gas exploration around the world.
An oil price of $65 a barrel would trigger the biggest drop in project finance in decades, according to a Sanford C. Bernstein analysis.