Upstream capex to fall sharply in 2020

• Published date: 01 July 2020
• DOI: http://doi.org/10.1111/oet.12807
• Date: 01 July 2020

LOOKING AHEAD

Upstream capex to fall sharply in 2020

The impact of Covid-19 on demand and the resulting low

oil and gas prices have forced producers to cut back

upstream capital expenditure this year, which should

tighten supply in future years.

Many oil and gas companies have already announced

large budget reductions as a result of the Covid-19 crisis,

most of which came following Q1 quarterly results. Overall,

the IEA says investment in the oil sector has been slashed

by30%thisyearduetothefallinpricesanddemand.US

independents have cut back particularly sharply, and

majors are also implementing cuts of 20% to 30%, as dis-

cussed in April's O&EMT—although there are now signs

that some companies also plan to boost M&A spending, in

order to take advantage of low asset prices. One example is

US independent W&T Petroleum, which has voiced an

interest in snapping up more acreage in the US Gulf, with

opportunities expected to emerge through distressed asset

sales as some companies struggle to survive.

National Oil Companies (NOCs) have also been

announcing cuts, including to exploration budgets,

which Wood Mackenzie expects will fall by over a quar-

ter on average in 2020.

1

Exploration spend affects the

long-term pipeline of projects, and is particularly high

among those with significant organic growth plans.

NOCs with a substantial international presence, such as

ONGC, CNOOC, Petronas, and PTTEP, are expected to

prioritise domestic activity, with deeper cuts to overseas

budgets. Wood Mackenzie senior analyst Huong Tra Ho

said that most of these NOCs carried strong govern-

ment mandates to improve oil (and gas) supply and

security, given constrained domestic resources. This

often means policy is less affected by day-to-day price

movements, with more strategic importance placed on

expansion, including in times of low oil prices, which is

also likely to encourage M&A activity. PTTEP, for

example, says it is on the look-out for M&A bargains

during the current downturn, helped by a low-cost base

and hedged crude sales.

Companies from countries with more ambitious

energy transition policies appear to be cutting capex most

sharply. For example, Japan's largest upstream player,

Inpex, said in May that it has slashed overall exploration

and development budgets by almost a third to Yen

219 bn ($2.04 bn) this year, with its capital expenditures

for development accounting for over 20% of the reduction

and exploration investments dropping more than 40%—

possibly reflecting more uncertainty over longer term oil

demand and the risk of stranded assets (see below). This

is also reflected among the European majors (Shell, Total,

BP, and Eni), which are cutting more deeply (and further

forward) into upstream oil and gas spending than their

US counterparts—under pressure not just from low

prices and demand, but also longer term decarbonisation

considerations in home markets.

NOCs with more ample reserves, and whose countries

reply heavily on limited oil revenues, are more likely to

prioritise current revenue and contribution to govern-

ment budgets at the expense of capital investments for

the future. Where such countries have suffered a lack of

access to dollars, such as in Nigeria and Angola, upstream

activity has all but ground to a halt. For example, in

Angola, all international companies—Total, Chevron,

ExxonMobil, BP, and Eni—have idled or scrapped dril-

ling rigs, according to Reuters. “We have suspended all

our drilling activities like all other operators in Angola,”

said Total, which produces half of Angola's output.

Many of the rich Gulf NOCs, including Saudi Aramco,

have also announced cuts, albeit relatively modest ones.

In late March, Aramco cut capex to $25 to 30 bn for 2020,

from earlier plans of $35 to 40 bn, and is reconsidering

2021 plans as well as cutting its workforce. Qatar Petro-

leum is also reportedly cutting staff numbers, but has not

announced any capex cuts, saying it will push ahead with

its massive expansion of LNG liquefaction capacity, with

no delay in target dates or spend.

1|EIA—E&D TO DROP BELOW

$10/BBL IN 2020?

The EIA says exploration and development expenditures

for oil companies as a whole could fall to less than $10/

boe in 2020 if the Brent price averages below $40/bbl,

given that about 25% of the Brent price is typically spent

(see Figure 1)—in 2019, it was $16/boe, which was about

a quarter of the average Brent crude price of $64/bbl.

2

DOI: 10.1111/oet.12807

12 © 2020 John Wiley & Sons Ltd Oil and Energy Trends. 2020;45:12–13.wileyonlinelibrary.com/journal/oet