How should oil companies behave under $20/bbl?

Oil&Gas Materials 5 May 2020 12:57 (UTC +04:00)

BAKU, Azerbaijan, May 5

By Leman Zeynalova – Trend:

International oil companies (IOCs) will look to cut more to get their own finances on an even keel and reassure shareholders amid the prices as low as $20 per barrel, Trend reports citing Wood Mackenzie research and consulting company.

The company recalls that cash flow breakevens for the Majors averaged $55/bbl pre-crisis.

“BP said this week it aims to reduce underlying breakeven to below US$35/bbl in 2021, and others are heading in the same direction. The primary lever is to cut investment – discretionary spend by IOCs will all but dry up in 2020,” reads the analysis of Wood Mackenzie.

Operators are signalling cuts of up to 50 percent to expenditure in the US Lower 48. “Only a handful of the 53 conventional pre-FID projects we expected to get sanctioned in 2020 will get the green light. These cuts make up a big chunk of the 20 percent to 25 percent reduction in spend the Majors have announced.”

What drives national oil companies (NOC) decisions isn’t quite so straightforward, according to Wood Mackenzie.

“Their stakeholder is the government, and the NOC may be central to their national economy – big employer, investor and a source of revenue through dividends and taxation. US$20/bbl oil isn’t just a problem for the NOC, it’s a national problem.”

Overall cuts in spend by NOCs so far are more muted, averaging 10 percent to 15 percent, said the company.

“Chinese NOCs are prioritising domestic investment to maintain production and employment. In the Middle East, ADNOC and Qatar Petroleum will likely proceed with big new gas projects where the scale and economics will win investment from the big IOCs. There have been concerns about market tightness in certain segments in the Middle East,” reads the report.

“Many others face an investment drought. Ten higher cost projects at pre-sanction stage in Nigeria, Mexico, Libya and Angola won’t get the support they need from IOC partners. Combined spend will be pushed out indefinitely into the future along with 0.4 million boe/d of new production.”

Wood Mackenzie believes that NOCs have to perform a tricky balancing act.

“To keep investment moving, costs need to come down. The service sector is the easy target; but the service companies are sizeable employers, too. They may be bound into the domestic economy through local obligation requirements and, in certain cases, may even be government-owned. NOCs need to take a strategic view of how they address the cost challenge of US$20/bbl oil. As operator and "national champion", many NOCs can shape the service sector, in ways not open to the IOCs. There are opportunities to change the commercial model with individual suppliers and bring in practices from other sectors, such as true open-book pricing. Many NOCs could also act as an aggregator of plans, providing the service sector with an aggregated demand profile.”


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