Rystad Energy reveals surprising data for the oil exploration and production market in 2020
The devastating effect of the COVID-19 pandemic on global oil and gas exploration and production (E&P) companies is best understood based on the industry's expected total annual revenues for 2020. An analysis of Rystad Energy shows that global E&P revenues are now forecast to decline by around $1 trillion in 2020, down 40% to $1,47 trillion from last year's $2,47 trillion.
Prior to the COVID-19 pandemic, Rystad Energy expected total E&P revenue to reach $2,35 trillion in 2020 and $2,52 trillion in 2021. Now, 2021 revenues are also projected lower, at $1,79 trillion.
The cash flow of companies should also fall. For 2020, Rystad Energy said it estimates free cash flow to the E&P sector will fall to $141 billion, or one-third of what it was in 2019. This is based on the base oil price scenario of $34 per barrel in 2020 and $44 per barrel in 2021, there is considerable downside risk if current low-level prices persist.
“This drop not only harms the solidity of companies and reduces the amount available for investments and dividends, but also significantly reduces the government's tax revenue. It will be a challenge for petro-states like Russia and many countries in the Middle East to sustain their budgets,” says Rystad Energy's upstream analyst Olga Saveenkova.
In the short term, national wealth funds may come to the rescue and plug holes in budgets to avoid spending cuts, but if the low-price environment persists, these countries could suffer serious financial difficulties, adds Savenkova.
Oil exploration and production profitability chart up to 2021
Initially, Rystad Energy expected upstream spending to drop about 20% this year as a result of the Covid-19 pandemic, which would reduce capital expenditures by $100 billion from the 2019 level. , now expects upstream spending to decline by 25%, from $530 billion in 2019 to $410 billion this year.
US shale remains the biggest contributor to reported plans to cut 38% of its previously announced capital budgets for 2020, implying a nearly 42% cut compared to 2019 spending. oil sands, which also revised spending by 42%. Conventional supply segments show cuts in the range of 19% for onshore to 12% for offshore deepwater assets, as these segments are not as flexible when it comes to managing their capital costs.
Rystad Energy said the CAPEX cuts will have a particularly strong impact on discoveries and the companies' ability to proceed with final investment decisions (FIDs) on new projects. This year could be marked by the lowest project sanctioning activity since the 1950s in terms of total sanctioned investments, falling to $110 billion, or less than a quarter of the 2019 level, with most projects being delayed.
It may take an operator several years to get a deferred project back on track as stricter economic requirements apply for a new FID. Facing the threat of prolonged oil prices, stakeholders are likely to lower the projects breakeven price requirement, which was already averaging below $35 per barrel even before the crisis. This will send many developments on a long-lasting journey of cost optimization.
But in contrast to the previous crisis, Rystad Energy said this time the situation is complicated by the distressed position of many utility companies. The oilfield services industry has already made substantial supply chain improvements, with significant cost reductions in 2015–2016, and operators cannot rely on repeat performance the second time around.
Operators are now showing extreme caution when it comes to future investment commitments, resulting in a drop in sanctions as projects are revamped and paused until oil prices recover. Considering the high maturity of most oil producing regions, this approach to dealing with the crisis puts large volumes of unauthorized production at risk, potentially hurting liquids production levels in the medium term.
Rystad Energy said at the same time that it sees a growing sense of decarbonization from E&P players and investment banks, with major players looking to achieve carbon neutrality. As a result, the current low appetite for new project sanctions could mean that “peak oil” will arrive sooner than was thought just a few months ago.
