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Oil Prices Decline Forces Royal Dutch Shell And Total To Postpone West Africa Offshore Projects

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Bidness Etc looks at Royal Dutch Shell and Total SA’s West Africa projects and why the projects are facing delays

By: MICHEAL KAUFMANApr 28, 2015

The decline in global oil prices has led to a downturn in the energy industry, with oil companies being forced to take drastic steps to address the situation. One of the steps that they have had to carry out is announcing project delays. Hence, it comes as no surprise that Total SA (ADR) (NYSE:TOT) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) have put their West Africa offshore oil projects on hold for the time being, reports the Financial Times (FT).

However, one positive aspect of the delay in the two companies’ respective projects is that they will get time for contractors’ costs to come down. Large oil companies are eyeing the waters off the West-African coast as one of the key sources of crude oil production in the times to come, FT reports. The multi-billion dollar projects include Shell’s offshore Bonga South West project in Nigeria. Bonga South West is Nigeria’s first Deepwater Development that is over 1,000 meters deep.

It has been a decade since the region started producing oil and gas. The project involves building of the largest production platforms in the world and it will require $12 billion in spending by the company. Shell is now saying that it will not be before next year when a decision is taken on the project.

Earlier in January, Shell had to shelve plans for a $6.5 billion project with Qatar Petroleum to construct a large petrochemical plant.

Total’s offshore satellite project off Angola’s Pazflor field, Zinia 2, faces a similar predicament. The company has had to revisit its contracts with suppliers as it is apprehensive about the expected capital expenditure on the project, which is much higher compared to the Pazflor field’s 78 million barrels of oil equivalent reserves. Total has a 12.5% holding in Bonga South West.

According to FT, in 2015, Total SA plans to reduce spending on projects such as Bonga and Zinia by $1 billion. But the two companies are only following a general trend in the industry, which has seen big reductions in capital spending. Some of the oil majors have undertaken massive cuts in spending of up to 10-15% in 2015. The current weak energy price environment has seen Brent crude plummet over 40% since June 2014.

As per the FT, Total CEO Patrick Pouyanne has said that the industry will have to become more efficient given that a long period of high cost inflation was followed by the decline in oil prices. At the IHS CERA oil industry conference in Houston, Texas, Mr. Pouyanne told attendees that they had a chance to change their cost base.

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