Oil & Gas UK Economic Report 2015

4. Global Reaction to the Oil Price Fall

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4.1 Capital Investment Cuts and Cost Deflation

of worldwide oil and gas capital is invested in the UK, the UKCS is particularly struggling to attract discretionary investment innewexploration, appraisal, or development activity. The primary reason for the global reduction in capital investment is to restore cash flow at a time when revenues have been negatively impacted by oil prices. However, it is believed that investors are also postponing investment in anticipation of further cost deflation in the near term. For example, rig rates across the world are falling and those for the North Sea are shown in Figure 9 overleaf. The day-rate for semi-submersible rigs fell by around 40 per cent from January 2014 to

Figure 8 shows the changes in worldwide capital budgets for oil and gas exploration and production companies between 2014 and 2015 and illustrates how budgets are being tightened globally and not just in the UK. A Wood Mackenzie survey of 44 organisations found that each company plans to spend on average $1.7 billion less in 2015 than they did in 2014, representing an average fall of just over 25 per cent. The vast majority of capital that companies still plan to invest in 2015 is on activity already committed to before the price fall. Although less than three per cent

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Figure 8: Capital Budget Changes, 2015 versus 2014

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Companies Investing in the UKCS Companies not Investing in the UKCS

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9

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Change in Global Capex Budget (US$ Billion)

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-6

-8

-10

Source:Wood Mackenzie

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ECONOMIC REPORT 2015