Global Upstream Industry Moves Into Survival Mode
As the fallout deepens from the coronavirus pandemic and the global collapse in oil and gas prices, oil- and gas-producing regions around the world are feeling the pain.
As the fallout deepens from the coronavirus pandemic and the global collapse in oil and gas prices, oil- and gas-producing regions around the world are feeling the pain. Brent crude, which began the year at about $66/bbl, was trading at around $26 on Monday morning, 23 March.
The good news, according to Wood Mackenzie, is that corporate financials are in better shape than during the 2014/2015 crash. The bad news is that room for maneuvering is very limited, which has driven the industry into survival mode. The burning question has become: Can companies cope with prices this low, and if so, for how long?
Debt and equity markets are all but closed for US independents. Liquidity for mergers and acquisitions is also limited. Survival, said the consultancy, will rely on swift and deep spending cuts across the board.
“We calculate an average spending cut of 57% will be required for our coverage if only upstream spend is targeted. A reduction of 41% would be needed across all spend categories, including dividends, to be cash-flow neutral at $35 per barrel,” said Roy Martin from the firm’s corporate analysis team.
Martin said more radical action may be needed if current low prices persist. “Balancing the books at $30 per barrel in 2020 is possible for many companies. But tough decisions would be required. Over $75 billion in 2020 discretionary exploration and development capex and $80 billion of shareholder distributions to be cut,” he said.
The Canadian crude sector is on life support. The net price of Western Canada Select (WCS) heavy oil fell last week to well below $10/bbl, factoring in its discount to WTI to reflect transportation and refining costs. “At $10 nothing works,” said Len Racioppo, managing director of Coerente Capital Management, which holds shares in Suncor Energy, Canadian Natural Resources, and Cenovus. “There have to be fewer companies. You have to be big and you have to be low-cost.”
Alberta Premier Jason Kenney said, “We have an industry that’s on life support.” On 18 March, the Canadian government announced broad economic supports and said it was talking with the oil and gas sector about separate measures.
Apache plans to reduce activity in Egypt and the North Sea while proceeding to a third exploration prospect in Suriname upon conclusion of operations at the Sapakara West-1 exploration well. The company cut its quarterly dividend from $0.25 to $0.025 per share, effective 12 March, and said it will use the $340 million of cash retained to further strengthen its financial position.
Total cut its capital budget by $3 billion to less than $15 billion, a drop of more than 20% from its prior guidance. It also will freeze recruitment and halt its share buyback program, but has not touched its dividend.
Saudi Aramco has reduced its capital budget from $33 billion in 2019 to $25–$30 billion in 2020.
Petronas evacuated all its staff from the Garraf field in Iraq, causing production to shut down.
Pharos Energy and TransGlobe Energy are slashing spending and adjusting production metrics in 2020. Pharos has suspended its January forecast to raise production from 5,055 B/D in 2019 to a projected 6500 ̶ 7500 B/D in 2020. Despite confirming its interest early last week in purchasing Shell’s onshore oil and gas assets in Egypt’s Western Desert as part of a consortium, the company made no mention of the prospective acquisition in its most recent statement. TransGlobe has cut its overall 2020 spending from $37.1 million to $7.1 million, with $5 million allocated to development work in Egypt and has slightly reduced planned production in Egypt and Canada.
Jadestone Energy has decided to delay development of its Nam Du and U Minh gas fields offshore Vietnam and will remove virtually all capital spending allocated for the project in 2020. The company now envisages startup of the two fields no earlier than late 2022. Its remaining 2020 capital program consists primarily of infill drilling at the Montara and Stag fields offshore Western Australia.
BP will postpone the launch of its 2020 energy outlook, saying it will use the additional time to consider any longer-term issues raised by current events and to ensure that the key insights from the outlook are fully incorporated into its corporate strategy. BP said the report is likely to be published in the third quarter ahead of the company’s Capital Markets Day in September.
Energean said it remains on track to deliver first gas from its Karish project offshore Israel during the first half of 2021. All three Karish Main development wells have been completed, and the hull of the FPSO Energean Power should depart the COSCO yard in China for the Admiralty Yard in Singapore in the next few weeks for topsides integration. Despite the impact of COVID-19, the workforce at the COSCO site has been maintained above 550 personnel. Energean is working with main contractor TechnipFMC to mitigate the impact of the deferred sailaway from China. Karish North should deliver first gas in 2022. While deciding to defer its exploration activity on Block 12 offshore Israel to help conserve capital, Energean said the Zeus and Athena exploration prospects remain attractive and it intends to re-visit its investment decision on both.
Repsol Sinopec Resources UK has secured a modified S92a helicopter from its service provider to transfer to shore any member of the company’s offshore workforce displaying symptoms of COVID-19. “We have retained flexibility in the arrangement to make this helicopter available to other North Sea operators to evacuate personnel displaying symptoms of COVID-19,” said Bill Dunnett, the company’s CEO.
Hess is putting its 2020 market focus on its Guyana discoveries. According to the company, the low breakeven costs of the project combined with the typically longer-lived (and large amounts of) offshore production should enable the partnership’s self-funding goal to be achieved within a couple of years. In the meantime, Hess said it has more than $1.5 billion of cash on the balance sheet to fund any partnership needs.