Oil price plunge set to spur widespread drilling project cancellations in Europe and Brazil

The IHS Unconventional Energy Blog will provide a brief weekly extract from the client program, Oil: The Great Deflation, a comprehensive view on the impacts of lower oil prices.

Outside of North America, nose-diving crude prices are expected to have a major impact on worldwide oil production, with the greatest risks for project cancellations occurring in Europe and Brazil.

In the latest of a series of webcasts tracking low oil prices and a comprehensive view of their impacts , "Oil: The Great Deflation," Bob MacKnight, director at IHS Energy, delivered a presentation called "The Global Response to Lower Prices." Cuts in capital spending on oil drilling in North America are the primary factor eventually expected to end the current price decline in the second half of 2015. However, the price drop will also result in major production declines in other regions over the short and long term.

The most immediate risk will be to some of the existing oil fields in shallow-water locations in Europe-particularly in the North Sea. These shallow-water plays account for about 50 percent of the new production at risk of cancellation in the near term.

This is because capital expenditures and well costs required to justify investment in oil drilling operations in shallow-water fields are high compared to other areas as a result of technical and location factors, MacKnight noted. Well costs will typically account for 40 to 50 percent of total development expenses for an oil drilling operation, so they represent a major driver in making many of these projects uneconomic at the current price.

Looking at the longer term, more than 1 million barrels per day of production in Brazil is at risk by 2030, MacKnight warned.

After Brazil, sub-Saharan Africa accounts for the most at-risk global oil volumes over the long term. In sub-Saharan Africa, 80 percent of the total 900,000 barrels per day of production at risk is located in deep water.

The next presentation in The Great Deflation Framework Series will be entitled "The China Chill: China's Economic Slowdown and Oil and Gas Market Implications."

By IHS Staff Writer

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.