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Oil Industry Needs To Slash Another $370B In Costs

Marcellus rig

A report by Wood Mackenzie has suggested international oil majors would have to hack off some US$370 billion from their total costs this year and in 2017. This will result in a production decline of around 3 percent this year and 4 percent next year.

In absolute terms, the declines will amount to 5 million barrels of crude this year, and 6 million barrels in 2017.

The report comes out at the same time as a warning from the UAE’s Suhail Al Mazrouei that the number of projects being delayed because of the low international prices could create an oil shortage in the future, even as “the market is moving toward balancing”. Although it appears with this week’s plunge in oil prices coupled with the massive US stock build, that the market is doing anything but rebalancing.

The doom and gloom sentiment was echoed by Total’s CEO Patrick Pouyanne, who in -October said that by 2020, these delays could bring about a shortage, and pleaded with the wobbly industry, which is made up of a significant number of state-run oil companies in now-floundering oil-dependent economies such as Angola and Venezuela, and zombie drillers that are already near thread-bare, to resume oil and gas investments.

Aggressive cost-cutting has already been criticized by some analysts and observers as risky, but alternatives are not exactly abundant. One such analyst, Bill Adams from audit and consultancy firm SC&H Group, warned earlier this year that “some executives are making dramatic and potentially damaging reductions,” while the smarter ones focused their attention on the supply chain to reduce costs.

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An earlier report by Wood Mackenzie forecast that the total spending cuts in the oil industry between 2015 and 2020 would hit US$1 trillion. Of this, US$740 billion would be cut from production and the rest would be cuts in exploration spending.

Not all is lost, however, since Shell’s CFO Simon Henry earlier this week said that demand for crude may peak in just five years, removing much of the current concern about any shortages. Henry said “… that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

Some are outright optimistic, such as Citigroup, whose head of commodities research Ed Morse told Bloomberg that he expected investments to start growing—not falling—in the next few years.

By Irina Slav for Oilprice.com

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