Funding Gap | Russell T. Rudy Energy LLC
A recent article in “World Oil” cites a study by international accounting and consulting group, Deloitte, which found that the global oil and gas industry has cut back on capital expenditures (CAPEX) to the point that current reserves and production cannot be maintained.
Historically, about 80% of CAPEX has been spent to replace proved reserves. However, these outlays have been cut by 50% in 2015 and 2016. John England, vice-chairman of Deloitte, LLP, observed “It takes significant capital for the industry to just remain flat. Actual and announced capital expenditure cuts suggest that even remaining flat could be a challenge for the industry, let alone meeting any expected growth.” He went on to say that even at the recent price of $50 per barrel, the investment cycle will take time to stabilize and recover. Assuming weak demand and reduced costs, the global energy industry will require a minimum outlay of $3 trillion of capital in 2015-2016 to insure long-term sustainability.
A capital investment of $3 trillion is not the only challenge facing oil producers. Additional funding is needed to strengthen balance sheets, service debt, and maintain already diminished dividend payments. Deloitte anticipates that over the next 5 years, operators will have to pay off $590 billion in debt and spend $600 billion in dividends. This could require a total of $4 trillion from 2016 to 2020, the total cash flow of the international majors, national oil companies and independent exploration and production companies combined. Even assuming an oil price of $55 per barrel, this would result in an investment shortfall of $2 trillion over the next 5 years.
In theory, oil prices above $55 would help address this difference. However, in reality, costs tend to rise with prices, thereby at least partially offsetting the benefit. Reducing exploration and development outlays might help address the production CAPEX deficit, but this risks long term supply disruptions and price volatility. The implications for natural gas are even more disturbing as we have yet to see the best years of demand for this fuel in the developing world.
Major oil companies might devote more attention to shale in the short term to shore up production rates and reserves, and there might be opportunities for further reductions in operating costs as opposed to CAPEX. Further refinement of project management and logistics might help, as would potentially strengthening relationships with host governments and suppliers.
Deloitte’s England concludes, “I have no doubt about this industry’s ability to innovate and adapt to meet ever-changing market conditions. This industry’s middle name is ‘resiliency’. This is not the first, nor will it be the last, downturn.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/6/15/upstream-industry-facing-2-trillion-funding-gap-over-5-years-deloitte.
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
