Friday, December 19, 2014

Bankers See $1 Trillion of Zombie Investments Stranded in the Oil Fields

A disused mining machine is displayed in front of an oil sands extraction facility near the town of Fort McMurray, Alberta, Canada. (Credit: Mark Ralston/AFP via Getty Images) Click to Enlarge.
After crude prices dropped 49 percent in six months, oil projects planned for next year are the undead -- still standing upright, but with little hope of a productive future.  These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela.

In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk.  They looked at 400 of the world’s largest new oil and gas fields -- excluding U.S. shale -- and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn’t over yet, but zombies are beginning to crash it.
The Goldman tally takes the long view of project finance as it plays out over the next decade or more.  But the initial impact of low prices may be swift.  Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy.  If the price of oil averages $70 in 2015, he wrote in an email, $150 billion will be pulled from oil and gas exploration around the world.

An oil price of $65 dollars a barrel next year would trigger the biggest drop in project finance in decades, according to a Sanford C. Bernstein analysis last week.

A pause in exploration and development may sound like good news for investors concerned about climate change.  A vocal minority have been warning for years that potentially trillions of dollars of untapped assets may become stranded due to climate policies and improved energy efficiency.  The challenges faced by oil developers today may provide a small sense of what's to come.

However, these glut-driven prices can’t stay low forever.  Oil production hasn’t slowed yet, but as zombie projects go unfunded, it will.  This is how the boom-bust-boom of the oil market goes: prices fall, then production follows, pushing prices higher again.  The longer this standoff goes, the more zombies will languish and the sharper the rebounding price spike may be.

Read more at Bankers See $1 Trillion of Zombie Investments Stranded in the Oil Fields

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