More than $150bn of oil and gas exploration projects worldwide are likely to be put on hold next year as plunging oil prices render them uneconomic, data shows.
Oil companies are trying to access more complex and hard-to-reach fields located, in some cases, deep under sea level as big oil fields that were discovered decades ago begin to deplete, leading to increased extraction costs and the need for expensive new technology.
Next year companies will make final investment decisions (FIDs) on a total of 800 oil and gas projects worth $500bn and totalling nearly 60 billion barrels of oil equivalent, according to data from Norwegian consultancy Rystad Energy, but falling oil prices are putting them in jeopardy.
The price of a barrel has plunged by 40 per cent in the last five months to about $70 and analysts forecast oil to average $82.50 a barrel next year. Head of analysis at Rystad Energy Per Magnus Nysveen said means around a third of the spending, or a fifth of the volume, is unlikely to be approved, potentially curbing supplies by the end of the decade.
"At $70 a barrel, half of the overall volumes are at risk," he said.
Around one-third of the projects scheduled for FID in 2015 are fracking or mining projects, where oil and gas are extracted using horizontal drilling, and of those 20 billion barrels, around half are located in Canada's oil sands and Venezuela's tar sands, according to Nysveen.
Projects in Canada's oil sands, which require expensive and complex extraction techniques, are the most unlikely to go ahead given their high investment requirements and relatively slow returns.
The report comes a day after the British government promised its oil and gas industry, worth around £5bn a year to government coffers, that it would cut tax rates in the sector to help dampen spiralling costs.
An independent review carried out by oil industry veteran Ian Wood estimated in February that around £200bn worth of oil and gas is still trapped in the North Sea, but the government concluded in a review published yesterday that it would have to reduce taxes to help the industry cope with huge costs and encourage oil firms to continue extracting.
The first announcements will be made in the 2015 budget, which is scheduled for March.
"The overall tax burden on the industry will need to fall as projects become more marginal, in order to achieve the goal of maximising economic recovery," the government review said.
Finance minister George Osborne announced a first attempt at tackling the oil and gas fiscal regime on Wednesday when he introduced a two percentage point cut in a supplementary oil tax charge.
As part of the review, the government has also decided to introduce an overarching investment allowance that will treat all exploration technologies equally.
"We recognise the low oil price is a concern. The changes we will make are not a one-off, we want to go further and there is more to do," said Priti Patel, a junior minister in Britain's finance ministry, in a telephone interview.
She added the government was in the process of picking priority areas to address first in consultation with the industry and that further fiscal regime changes would be announced at the next budget.
Some representatives of Britain's oil sector welcomed the first fiscal changes at an industry event in London yesterday but said further action was urgently needed.
Patrice de Vivies, senior vice-president for northern Europe at French oil major Total, said at the event the oil firm may have to postpone some investments from next year into 2016 because of the weak oil price environment.