U.S. shale projects may be vulnerable to short-term investment cuts in relation to deepwater projects, according to a Dec. 9 report by petroleum investment advisor Gaffney, Cline & Associates (GCA).

Oil and gas companies are facing reduced cash flow in 2015 due to the recent decline in oil prices to a five-year low. That dip has been blamed on reduced demand and global oversupply, with much of the oil production oversupply coming from U.S. unconventional production. As a result, companies will be scaling back or reprioritizing their spending.

However, recent analysis by GCA indicates shale activity will most likely suffer investment cuts first due to low oil prices, leaving the deepwater Gulf of Mexico and other deepwater plays relatively more protected.

Strong offshore Gulf of Mexico projects can be still viable down the $60/barrel, said paper co-authors Cecilia Jing Cui and Neil Abdalla. Although pain is likely for areas like the offshore Gulf of Mexico in 2015, it should be much better placed to weather the storm of depressed oil prices in the short-term than the U.S. onshore unconventional industry, said Bob George, executive director and senior strategic advisor at GCA.

“Whilst high cost environments such as the deepwater Gulf of Mexico would appear to be vulnerable, and undeniably cuts should be expected there, economic rationality suggests that the brunt of cuts should be directed at onshore unconventional investments,” said George. “However, in the short-term there is not always the operational flexibility to make decisions based solely on fundamentals.”

While shale operators can cut back or ramp up shale drilling in more rapid response to fluctuating oil prices, deepwater projects have a longer-term investment cycle, with investments of $1 billion or more and a five-year timeline before returns are seen, said George.

Deepwater projects already underway are less likely to be halted due to low oil prices, but the expected price of oil in 2020 poses a risk for deepwater projects.

“Exploration in 2015 is the 2018-2020 investment project, and halting exploration prematurely may mean not having the next project to take advantage of a stronger price environment at a later time,” said GCA in the report.

Actual spending cuts will be determined by a large number of individual company factors, and the cash flow squeeze will undoubtedly cause cuts to be felt everywhere. While onshore shale companies include a range of players from small independents to majors, deepwater companies include large independents and majors, for whom it is more an issue of capital allocation versus financing.

“Thus, to preserve value for the future suggests that companies with both types of assets in their portfolio, onshore unconventional projects will deferentially be deferred, where other factors do not prevail.”

Earlier this year, GCA reported that shale “sweet spots” would still be viable at lower oil prices, but companies operating outside these areas could be pinched if oil prices continued to decline.

Deepwater Gulf of Mexico production is expected to set a new record in 2016 thanks to new developments and the expansion of older oil fields, Wood Mackenzie reported last month. But production beyond the 2016 peak is expected to decline as legacy fields are depleted and a limited number of new projects are expected to come onstream.

6 Comments on "Shale Vulnerable to Short-Term Investment Cuts Versus Deepwater"

rockman on Mon, 15th Dec 2014 12:03 pm 



“Strong offshore Gulf of Mexico projects can be still viable down the $60/barrel” And once again a very foolish statement. As explained before there is no price of oil at which any play is or isn’t viable. There are DW GOM projects viable at $40/bbl and DW GOM projects that aren’t viable at $100/bbl. Just as there are individual shale wells viable at $40/bbl and wells not viable at $100/bbl. And true for all conventional plays as well as the Canadian oil sands.

The good news about a DW GOM project: The decision to pursue it isn’t a function of the price of oil on the day that decision is made. The bad news about a DW GOM project: The decision to pursue it is a function of the estimated price of oil on the day that the field begins producing. A price no one can predict with any reasonable expectation of accuracy.

Consider Chevron, the biggest DW GOM player. The $7.5 billion Jack/St Milo project: the discovery well was drilled in 2004 and a confirmation well in 2005. Oil was selling for $40/bbl then. Do you think Chevron was projecting a price above $100/bbl back then? It also make one wonder why Chevron reduced their interest in this project from 50% to 40% in 2013. Chevron also owns a 60% interest in the Big Foot project. The $5.1 billion development is expected to begin production in 2015. It was discovered in 2006.

And now the future: Just 2 months ago Chevron announced a new oil discovery at the Guadalupe prospect in the DW GOM. The well encountered significant oil pay and is in 4,000’ water and at a depth of 30,000’. Given it will be at least 5 to 8 years before production begins what oil price should be used to determine the economic viability of this multi $billion investment?

Harquebus on Mon, 15th Dec 2014 5:06 pm 



@Rockman. Fiat currencies which, the $U.S. is one, are intrinsically worthless and throughout history, all have failed. Using economics to justify roi in energy markets is wasted space. EROEI is a much better formula. If EROEI had been factored in shale drilling, the tight oil wells would have been realized as dud deal a lot sooner.
Using something that is worthless to value something that is precious is just plain stupid and that fact is now starting to bite.
Energy makes money, money does not make energy. EROEI mate, EROEI.

Davy on Mon, 15th Dec 2014 6:44 pm 



Hark, eroi, is indeed the systematic macro measure of choice especially by science. Yet, eroi is not very effective in a micro environment of a business plan.

The big picture is for the opine in the abstract . The little picture is about making money with the cards dealt. The big picture matters but there is no way to manage that for a return on investment short term. Longer term Eroi is a great way to determine if a resource sector is worth being in. Applying eroi now in regards to the longer term puts shale oil in a poor light as an example.

shortonoil on Mon, 15th Dec 2014 7:19 pm 



If EROEI had been factored in shale drilling, the tight oil wells would have been realized as dud deal a lot sooner.

The Etp model was developed by about half a dozen consulting engineers. It is based on a thermodynamic equation that can be located in any text book on the subject. One of the questions that we had early on was how could it be that we were the first to stubble upon such an obvious analytical technique. The petroleum industry has 10,000’s of engineers, and physical scientists who have been investigating this industry for more than a 100 years. Our conclusion was, that we weren’t!

The petroleum industry has been running a one trick pony show that guaranteed it access to almost unlimited capital for the last century. They sold the reserve, reserve, reserve concept hook line, and sinker to the financial industry. Need a trillion dollars to go drill in some brick yard in North Dakota; no problem; just tell them that there is 900 Gb of oil there for the taking. The fact that it had an ERoEI so low that it ensured it would be a breakeven at best was also no problem. Hedge Fund managers know as much about ERoEI as they do about the back side of the moon. Use a little bit of creative accounting, and the money shows up by the truck load.

The problem is that now reality is beginning to stick its ugly head out of holes drilled for shale oil, bitumen mines, and 30,000 foot deep wells in the arctic. These ventures have been riding conventional crude like a cat rides a dog. Dig in your claws, and do a lot of screaming. But the old hound is now getting tired, and is not going to put up with the free loader much longer. These low ERoEI projects are going to get swept off as the doorways get tighter and tighter.

http://www.thehillsgroup.org/

rockman on Tue, 16th Dec 2014 12:08 pm 



h – “If EROEI had been factored in shale drilling, the tight oil wells would have been realized as dud deal a lot sooner.” The only problem with that thought is that the shales as a whole have a positive EROEI despite what folks who never drilled a well like to claim. In fact, if you read my post more closely you’ll see that poor economics using that fiat coin will kill shale drilling long before the EROEI gets below 4 or 5.

Harquebus on Tue, 16th Dec 2014 6:11 pm 



Energy invested also includes, sustaining a workforce (food and water), housing, building and maintaining infrastructure, education, consumables, supporting industries etc., etc. Factoring the energy invested in the fields alone is excluding the most of the energy needed.