Oil, Gas Drillers Said Facing $2 Trillion Funding Gap

Citigroup's Morse: The Oil Market Is Coming to a Balance
  • Deloitte warns of underinvestment risks over next five years
  • Capex below minimum required to replace reserves: report

Drillers forced to slash spending during the oil slump may soon be facing another hurdle: a funding shortfall to the tune of $2 trillion over the next five years.

That capital crunch creates the risk for underinvestment, perhaps affecting the availability of reserves in the longer term, according to a study published Wednesday by the Deloitte Center for Energy Solutions.

The global oil and natural gas industry has curbed capital spending "to a point below the minimum required levels to replace reserves," the Deloitte report said.

"That is quite unusual," Andrew Slaughter, executive director at the Center, said of the funding gap in an interview. "You’ve got to spend a lot of capital just to stand still, even without growth."

In the midst of the worst price downturn in a generation, producers have significantly cut down on costs. The global oil and gas industry has trimmed more than 350,000 jobs, while oil explorers slashed more than $100 billion in annual spending last year.

Spending Cuts

ConocoPhillips, the third-largest U.S. oil producer, cut its dividend by 66 percent and trimmed its capital expenditures guidance by 17 percent in February -- and then by another 11 percent two months later. Anadarko Petroleum Corp. estimated its 2016 spending would be nearly 50 percent lower than last year’s, which comes in addition to planning $3 billion in asset sales, cutting its dividend and shedding jobs.

Now that oil has touched the $50 mark, some companies are considering ramping up operations. Still, a capital gap for the industry means "the outlook could be for lower reserve coverage than we’re used to," Slaughter said. North American companies will face the biggest challenge because they became the most over-leveraged during the boom, he said.

Many companies will still need to strengthen their financial positions before any real capital gets spent, Slaughter said. And with about $590 billion of the industry’s debt maturing in the next five years, capex may not be the first priority, according to the report.

"It’s not like you can turn the tap on and make the capital flow," Slaughter said.

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