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    Cost reduction not enough says Wood Mackenzie

    News // September 21, 2015

    In a comprehensive analysis looking at the impact of cost deflation on the global upstream oil & gas sector, Wood Mackenzie concludes that while operators are seeking an average cost reduction of 20-30 per cent on projects, supply chain savings through squeezing the service sector will only achieve around 10-15 per cent on average.

    "In order to ensure projects are economically viable, operators will also need to focus on project optimisation and adopt smarter ways of working with the service sector," said Wood Mackenzie.

    Illustrating the need to reduce costs in the industry, Wood Mackenzie's analysis estimates that US$1.5 trillion of uncommitted spend on new conventional projects and North American unconventional oil is uneconomic at US$50 a barrel.  

    James Webb, Upstream Research Manager for Wood Mackenzie, said: "As the upstream industry responds to the low oil price, investment is down US$220 billion in 2015 and 2016 compared with our pre-oil price crash projections. In addition to reduced activity onshore North America, a total of 46 projects have been deferred as a result of the oil price fall. We estimate that as much as US$1.5 trillion of investment spend destined for new (pre-sanctioned) and US tight oil projects is now out of the money, or in starker terms, uneconomic at a US$50 oil price. This spend is very much at risk."

    Obo Idornigie, Principal Upstream Research Analyst, said: "The implications of this level of reduced investment is huge for the industry's service sector which is of a size to comfortably accommodate an average of 40-50 new projects globally a year. We expect just six new projects to go ahead in 2015 and around ten in 2016."

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