The World Just Lost One Of Its Biggest Oil Plays To Low Prices
Energy analysts Wood MacKenzie said last week that low oil prices have now caused the delay of 68 planned petroleum projects globally. Representing $380 billion in frozen capital expenditures.
And news late last week shows it’s not just the private sector shutting things down in oil development.
Governments are also now looking to hold off on developing their in-ground reserves at low prices. Led by oil powerhouse Brazil, which said Friday that it will discontinue offering new offshore projects in one of its most prospective regions.
That’s the deepwater pre-salt play. A target that over the last several years has yielded some of the biggest multi-billion barrel finds seen anywhere in the world.
But Brazil’s President Dilma Rousseff told a press gathering Friday that there will be no more new exploration in the pre-salt for the foreseeable future. Saying that the government will hold off auctioning new blocks in the play for the “short-term”.
“No one holds an auction for an exploration block with the barrel below $30 unless you want to give it to someone,” Rousseff was quoted as saying by local press.
Rousseff did say Brazil may still offer licenses over less-prospective targets. Including projects in the onshore, which she described as “less profitable” than offshore plays.
This is an interesting move — basically amounting to a government admission that it would rather keep oil in the ground than produce it at today’s lower prices.
That suggests officials are willing to forego royalties and taxes today in the hopes that prices rise down the road. Hopefully lifting payments to the government if oil is produced after a resurgence in the market.
This may make some sense. If prices rise, then development will be more profitable in the pre-salt. And if the market stays depressed, project deferrals like those identified by Wood Mackenzie will likely mean lower development costs — which could increase profitability, and potentially boost payments to the government.
All of which amounts to an interesting sign of the current uncertain times in the oil business. Watch for further slowdowns in activity, as E&Ps, governments, and services firms look for direction on where the market might be headed.