International upstream investment is expected to fall by more than 20% this year - a decrease of nearly $100bn - but deepwater developments are expected to amongst the least affected, according to a new report from the International Energy Agency. 

The biggest worry is that combined impact of a recovering world economy and deferred new production could send the price of oil and gas spiralling upwards towards the record figures first seen in the early part of 2008. 

There were also some ‘givens’ that came out of the report, ie that smaller independent operators have been affected more severely as a result of the the credit crisis than the supermajors.  And the UK sector, one of the most mature in the industry, has been severely hurt by both the downturn and credit difficulties. There were only 18 E&P wells drilled in the first quarter of this year, down 40% from last year, while exploration drilling on its own is down 78% from 2008. 

Projects on the block

The biggest hit, though, has been taken by proposed oil sands developments in Canada with 15 projects suspended and one delayed. These projects had been estimated to produce upwards of 1.8mb/d when they were all onstream in 2014. 

According to the IEA, since October 2008, 20 major projects,with a planned investment of $170bn and production capacity of 2mb/d and 28bcm/d, have been deferred or cancelled.  Another 35 projects with expected production of 4.2mb/d and 65bcm, have been delayed by at least 18 months.  The biggest project being deferred is Saudi Aramco’s Manifa offshore development which is expected provide 900,000b/d. 

The announced drop in capex rose as one went down the ladder.  The super-majors have cut back by just 5%, while the top 12 will reduce spending by 12%, but the next 25 companies will see a reduction in real terms of 20%. 

But for those companies involved in deepwater activities, the prospects are not quite so grim.  According to the report, ‘investment in deepwater developments is expected to be less affected than onshore drilling, largely because deepwater projects tend to be much larger in scale and undertaken by the largest international and national companies, which rely to only a limited degree of corporate borrowing’.  

According to the IEA, these projects are based on prices of $40-50/bbl and yield an internal rate of return of 8-9%.  Operators are not likely to cancel such projects if prices were to remain below that range for several months, because the expectation is that they will eventually recover. For example, Petrobras is pressing ahead with ambitious plans to develop its pre-salt deepwater finds in the Santos Basin with pilot production beginning in 2009.  

According to the report, the companies, mostly mid-majors, which have taken the most drastic axe to their capex budgets (2009 budget versus mid-2008 projection) include: Lukoil,-52%; CNR, -51%; Apache, -39%; Rosneft, -31%; Devon Energy, 31%; Eni, -26%; and Talisman, -25%.  Amongst the super-majors, Chevron has wielded the sharpest axe slashing 21%, while BP and Total have cut around 17%. 

From our correspondent in Norway, Nick Terdre, came this caustic comment on the IEA report:  Looking at a table (page 25) of the report, it has some glaring errors. Such as a UK project labelled Forties with an operator called Kessog.  What's all that?!  And it gives a current completion date for Cheviot (ATP Oil & Gas) of 2010.  My Britboss report had 2010 in late 2007, then 2011 through 2008 and now 2012 and there's still no indication that it has stopped moving forward.  So if these are indicative of the accuracy of the data, it doesn't inspire confidence in the reliability of their conclusions.