Wood Mackenzie: Oil & gas companies have three ways to survive with lower oil prices

Oil&Gas Materials 23 March 2020 11:45 (UTC +04:00)

BAKU, Azerbaijan, March 23

By Leman Zeynalova – Trend:

The upstream oil and gas sector faces unprecedented uncertainty amid lower oil prices, Trend reports citing Wood Mackenzie research and consulting company.

“The range of outcomes for investment is very wide, but it is clear oil companies must act quickly. There are strong parallels to 2015-16, but the macro-environment is very different this time. Even if OPEC+ returns to the table and comes to a new agreement, recent events have irreversibly changed the perception of risk. The genie will not be put back in the bottle,” said the company.

Wood Mackenzie believes that cuts to discretionary investment will be immediate and deep. “Global spend could fall by well over 25 percent year-on-year.”

The company says to improve their chances of survival at low prices, companies have three main levers to cut expenditure:

Drive efficiencies to extract the same or similar production for lower investment;
Defer the sanction (FID) of new projects;
Reduce activity levels and costs in the base business (including short-cycle investment, exploration and operating costs).

“Large new projects will be put on hold and short-cycle discretionary investment will be dialled back to the bare minimum. Spend on projects under development and onstream will also be targeted. Exploration will be trimmed; operating and other fixed costs face intense scrutiny,” reads the report.

Wood Mackenzie said only the lowest-cost producers with the strongest finances will be in a position to make meaningful discretionary investments. Any decision to follow Saudi and Russia and grow output will likely be driven by policy rather than economics.

“If prices do not rebound quickly, we’ll see a significant impact on currently producing fields and future supply. At a Brent price of $35 per barrel, revenue from 4 million b/d (4 percent) of global liquids supply does not cover production costs and government share. This rises to 10 million b/d (9 percent) if prices fall to $25 per barrel,” said the company.

In the short term, companies, governments and other stakeholders are likely to continue producing assets at a loss, as they have in the past, in the hope the price will rebound quickly, according to Wood Mackenzie.

“But, the current trifecta of oversupply, demand evaporation and global behemoths fighting for market share may require immediate and dramatic action.”


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