A study published by Deloitte on the risk of underinvestment in the oil & gas sector concluded that the industry will need to invest a minimum of US$3 trillion (£2.12 trillion) in exploration and production (E&P) by 2020 in order to maintain output and reserves at the present level.
However, Deloitte foresees the industry may not have enough cash flow to cover these needs, which could result in a £2.12 trillion shortfall as a result of potential cuts in capital expenditure.
“Underinvestment will likely be the reality, but E&P companies should at least enter the next decade with a much improved financial health to take the industry forward”, Deloitte England, US and Americas Oil & Gas Leader, John W. England, said.
E&P Needs To Invest US$3 Trillion To Survive Price Crunch
According to the report, upstream E&P firms have cut their capex by 25% last year and are bound to do the same in 2016.
Since this spending has been used to sustain reserve and production levels, and considering the current level of demand, new discoveries will be key to meet market needs. “Simply put, it takes a lot for the industry to just stay flat”, the report reads.
Another issue is that a cut in expenditure by more than 20% is sure to have a negative impact on reserves and supply, Deloitte adds.
“The industry’s capex levels have gone below the minimum required levels to offset depletion, let alone meet any expected growth”, the report states.
Global Upstream Spending To Fall By 30%
Meanwhile, Wood Mackenzie also published a report on Wednesday stating that global upstream development spending has seen a 22% decline in 2015-2020, or just over US$1 trillion (£706.7 billion).
“The impact of falling oil prices on global upstream development spend has been enormous”, Wood Mackenzie Principal Analyst, Malcom Dickson, said.
According to the analyst, the outlook is bleak: “compared to the pre-oil price fall expectations, capex will be down by around US$370 billion or 30% in 2016 and 2017”.
Throughout this year, Wood Mackenzie expects to see further cuts and decreasing investment levels, “as more projects are dropped and companies struggle to break even”.