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Plunging Oil Prices: Options for Long-term Project Participants affected by the Price Collapse

Plunging oil prices over the past six months have left many participants in long-term energy projects looking at very different deals from the ones they signed. Having hovered around US$115 per barrel in June 2014, prices have recently slumped below the US$50 mark, with Gary Cohn, Goldman Sachs' COO, suggesting on 26 January that they could slip as low as US$30.

As a result, a number of high-profile projects worldwide are likely to be or have already been shelved or cancelled. Within the last week, Shell has announced a US$15 billion cut in capital spending over the next three years, while BP has announced plans to cut capital expenditure by US$4–6 billion this year. Similarly, Statoil has stated that it has returned three licences for exploration off the coast of Greenland, while Premier Oil has delayed its final decision on the US$2 billion Sea Lion project off the Falkland Islands until oil prices recovered.

What does this plunge in prices mean for a joint venture partner or investor who has, for example, agreed substantial capital commitments for years to come on the basis of, say, a US$80 barrel of oil?

This Insight considers some options available to participants in ongoing long-term projects whose economics have been altered by the drop in oil prices.

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