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Despite industry wide cost cuts, Wood Mackenzie warned on Monday that more supply chain savings are needed as low oil prices push $1.5 trillion of new upstream spend out of the money.

The analysis concluded that upstreams must focus on project optimization and close collaboration with service firms to reach a target average cost reduction of 20 to 30 percent on pre-sanctioned and U.S. tight oil projects.

Wood Mackenzie estimates that $1.5 trillion of uncommitted spend on new conventional projects and North American unconventional oil is uneconomic at $50 a barrel.
West Texas Intermediate crude was trading at about $45.97 per barrel near midday on Monday while Brent crude prices ticked up to $48.41 per barrel.

“Squeezing” the service sector will only generate about 10 to 15 percent in supply chain savings, the report added.

Last year’s oil price rout is expected to drag upstream investment down by $220 billion in 2015 and 2016 from Wood Mackenzie’s pre-crash projections.

Onshore activity in North America has already taken a big hit, with the number of U.S. land rigs falling to 806 last week from 1,856 rigs a year ago.

Low oil prices have also prompted energy companies to defer 46 projects to date, Wood Mackenzie noted.

“We estimate that as much as $1.5 trillion of investment spend destined for new (pre-sanctioned) and US tight oil projects is now out of the money, or in starker terms, uneconomic at a $50 oil price. This spend is very much at risk,” upstream research manager for Wood Mackenzie  James Webb said.

Lower upstream spends have rocked the service sector, with several waves of layoffs hitting the industry across the globe.

While the service sector can “comfortably accommodate” an average of 40 to 50 new projects globally every year, principal upstream research analyst Obo Idornigie said Wood Mackenzie expects just six new projects to move forward in 2015 and about ten the following year.

“The weak pipeline of new projects is resulting in very competitive bidding from the service sector as E&P companies negotiate hard on pre-sanction projects…  However, the industry needs to strike a balance between near and long term drivers. Pushing the service sector too hard now is only likely to shore up problems once more attractive fundamentals return: Increasingly severe job cuts means that the industry is losing skilled resources that will take time to attract back when prices recover,” Idornigie explained.

While several years of low oil prices could bring about “profound, structural changes” to industry costs Webb said that, with oil prices expected to recover in 2017, those changes are unlikely.

However, Webb added that re-working field development plans and optimizing project design could help upstreams realize supply chain savings of 20 to 30 percent.

“Stronger collaboration between operators and service companies will be key in driving efficient practices. The winners therefore are likely to be operators with a strong pipeline of near-term projects close to sanction which are able to take advantage of the trough in costs through 2015/16,” Webb said.