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Expert Commentary - The Consequences of Low Oil Prices on Investments

 Doha, Qatar

Almost every day the number of countries imposing restrictions aimed at containing the outbreak of COVID-19 on their citizens’ increases. These severe bans, alongside economic slowdown, have caused a large reduction in energy demand around the world. This has forced the largest energy consumers from such countries as China and India to declare force majeure clauses on their oil and gas contracts, in an attempt to protect their importing companies from fulfilling contractual agreements.

On Sunday, 12 April 2020, the 10th  Extraordinary OPEC and non-OPEC Ministerial Meeting was held via videoconference, and the OPEC+ alliance agreed to cut production by 9.7 million barrels a day. Brent crude rises 4% in the volatile trading session after the deal.

The current low oil and gas prices - with Brent and WTI crude trading at $33.86 and $21.61 per barrel respectively, and natural gas Henry Hub trading at $1.66 per mmBtu on April 14 - have dealt a severe shock to the major oil and gas companies across the world.

It is necessary to take steps to sustain stable business operation and to remain resilient during this situation. A large number of oil and gas producers of all sizes have had no option other than to announce several radical cost-cutting policies on their capital and operational expenditures (CAPEX and OPEX) in response to the market downturn and to minimise the impact of the rapid decline in global oil and gas prices, adjusting and delaying investment plans and the sale of assets. The GECF Secretariat consistently monitors and assesses these market dynamics in order to evaluate supply chains and investment processes critical to GECF Member Countries (see Table 1).

Table 1. Some major oil and gas companies’ actions to reduce operating and capital expenditures (alphabetical order)

Company

Cut in Operating and CapitalExpenditures

Aker BP

The company CAPEX is expected to drop to$1.2bn from an estimated $1.5bn.

Apache

Reduced its 2020 capital investment plan tobetween of $600-700mn, from $1.6bn to $1.9bn.

Aramco

The company expects its capital spending for2020 to be between $25bn and $30bn, compared to $32.8bn in 2019. CAPEX plansfor 2021 and beyond are also under review.

ARC Resources

Will cut its capital budget by 45% to aboutC$300mn from initial C$500mn.

Beach Energy

Will cut its capital expenditure by 30% inthe financial year 2020-2021 (July-June) relative to its prior planning. Thecapital expenditure for the year to June 2020 remains unchanged atA$875-950mn.

Birchcliff Energy

Will defer C$65mn of 2020 capital expendituresfrom a budget of C$340-360mn.

BP

Has slashed its capital expenditure plan for2020 by 25% or a $1bn reduction to $12bn.

BW Energy

Will cut its 2020 capital expenditure by 50%from approximately $250mn to $125mn.

Cairn Energy

Has slashed its 2020 capital expenditureplan by 23%. CAPEX is now anticipated to be below $45mn. Exploration CAPEXwill be reduced to $100mn from a forecast of $150mn.

Centrica

Total capital expenditure including upstreamis now expected to be around £600mn, compared with around £800mn at the timeof the preliminary results. Delaying £100mn of restructuring expenses. £204mnbonuses to management and non-customer-facing staff for 2019 have also beencancelled.

Chevron

Will cut $8bn of its capital and exploratorybudgets in 2020, as below:

·    $2bn in upstreamunconventionals operations, primarily in the Permian Basin.

·    $700mn in upstream projectsand exploration.

·    $500mn in upstream basebusiness in the US and international assets.

·    $800mn in downstream sectors.

Cimarex Energy

Expects to cut spending by 50% from itsoriginal plans to a new target of $1.25bn to $1.35bn.

ConocoPhillips

Will reduce its 2020 capital expenditure by$700mn, representing about a 10% decrease. It will also reduce its 2020planned share repurchase programme to a quarterly run rate of $250mnbeginning in Q2, from the previous run rate of $750mn. The combined moves areexpected to reduce 2020 cash use by $2.2bn.

Continental Resources

Will reduce its 2020 capital expenditures by55%, dropping it to $1.2bn, from the original budget of $2.65bn.

CNOOC

Will trim its annual investment by 10%-15%in 2020. The company will reduce losses at its money-losing firms by 5bn yuan($710mn).

Devon Energy

Slashed its 2020 budget by $800mn to $1bn,down 45% from the original plan.

Ecopetrol

Cuts $478mn expenditure and a decrease ininvestments by $1.2bn to a range of $3.3bn to $4.3bn.

Energean Oil & Gas

Will reduce its investment by $155mn in 2020CAPEX in Greece and Israel, as well as $140mn cut for its Egypt project.

Eni

Will cut its CAPEX by 25% or 2bn euros($2.2bn) in 2020, from around 8bn euros ($8.64bn), and also will cut byaround 2.5bn to 3bn euros in 2021. It also said it would be cutting itsoperating expenses in 2020 by around 400mn euros.

EnQuest

Will cut its operating expenditure by 30% to$375mn and investment will be lowered by $80mn to $150mn.

EOG

Is cutting CAPEX spending for 2020 by 31% toa range of $4.3bn to $4.7bn.

Equinor

The company will slash its organic capitalexpenditure budget for 2020 by around 20% to around $8.5bn, from $10-11bn, asbelow:

·    Reducing exploration from$1.4bn to $1bn. (Its exploration spend in 2019 totalled $1.85bn).

·   Reducing its operating costs by $700mn.

ExxonMobil

It would cut its planned capital expenditureby 30% from $33bn to $23bn, and also target a 15% reduction in cash operatingexpenses.

Genel Energy

Will reduce its capital expenditure to $60mn,with an expectation that it will be around $100mn in 2020.

Hess Corporation

Has revised down its capital and exploratorybudget to $2.2bn for 2020, a $800mn reduction from the previous budget of$3bn.

Hoegh LNG

Has a cost-saving plan on overhead andvessel operating costs, targeting $9-$11mn in savings for 2020. Also hasdecided to suspend dividends and bonus scheme.

Husky Energy

Has cut its upstream CAPEX budget by 33% orC$900mn ($650mn) to C$1.75-1.9bn ($1.25-1.36bn), from C$2.625-2.8bn.

Imperial Oil

Would cut its spending this year by C$1bn(US$704mn) as below:

·    Capital spending will bereduced by 30%, or C$500mn, to between C$1.1bn and C$1.6bn.

·   Operating expenses by C$500mn from 2019 levels.

Inpex Corporation

The company is looking to optimiseoperations, review investment plans and cut costs, without giving anydetails.

Kosmos Energy

Will slash its capital expenditure by around30% to $200-225mn, from its initial estimates of $325mn to $375mn.

Lundin Petroleum

Will cut its planned costs by $170mn oraround 13%.

Maersk Drilling

The company revised down its financialguidance to $325-375mn from $400-450m. The guidance for capital expendituresremains unchanged at $50-200mn.

Marathon

Cuts its capital expenditures of $500mn orabout 30%.

Murphy Oil Corporation

The company revised down its 2020 capitalbudget by 35%, which is about $500mn equates to $950mn, from the previous budgetof $1.4bn to $1.5bn.

Noble Energy

Has slashed its planned capital expenditureby nearly 30% or $550mn, to $1.1-1.3bn.

Oil Search

Has cut its investments in 2020 by 38% to$440-530mn, down from $710-845mn.

OMV

The board has approved an action plan ofmore than €4bn for 2020, which includes:

·    Cut of around €500mn inorganic investments.

·    Cut of around €200mn againstlast year’s operating and exploration expenditure.

·   Deferred the payment for the 39% stake in petrochemicals firmBorealis, meaning the final €2bn payment will now only be due at the end of2021.

ONEOK

Cuts its capital expenditures of $500mn orabout 30%.

Origin Energy

Is targeting a 25-30% reduction, which isabout A$300-400mn in capital expenditure in the 12 months to June 30, 2021(FY2021) compared with previous FY2020 guidance of A$530-580mn (US$320-350mn).

Ovintiv

Has cut its capital budget by about $300mnand its full-year cash costs by around $100mn from earlier projected $2.7bncapital program for 2020.

Oz Santos

Has cut a 38% or $550mn in 2020 capitalexpenditure.

PDC Energy

Is cutting its annual $1.0bn to $1.1bn, pluscapital investment budget by 20–25%.

Pembina Pipeline

The company will slash its capital spendingplan by almost half, cutting between C$900mn and C$1.1bn ($617-755mn) to alevel of C$1.2-1.4bn.

Petrobras

Has decided to cut planned investments for2020 from US$12bn to US$8.5bn, idling some platforms, delaying exploratoryactivities and postponing a dividend payment. It is also cutting $2bn fromoperations.

Plains All American

Will cut its capital spending by 47% down to$1.55bn. That reduction includes the $600mn saved on the deferral until atleast 2021. The company also is cutting its distribution payouts to investorsby 50%.

Premier Oil

Premier expects a $100mn reduction inplanned 2020 capital spending.

QEP

QEP’s capital budget for 2020 and 2021 willbe reduced by more than $300mn or nearly 30%. Previous 2020 CAPEX had been$225mn.

Respol

Has reduced its cash investments by 26% orabout $1bn. The company will further seek to reduce operating costs by morethan $385mn.

RockRose Energy

Its capital expenditure in 2020 will bereduced by at least $80mn, down from the original plan of around $200mn.

Schlumberger

Will cut its spending by 30% this year fromlast year’s levels, without giving any details.

Seven Generations Energy

Is reducing its 2020 capital budget by 18%,from C$1.1bn to C$900mn.

Shell

The Anglo-Dutch major Shell has scaled backits capital expenditure plan for 2020 by 20% to $20bn or less, as below:

·    Operating costs reduced by$3-4bn per annum over the next 12 months compared to 2019 levels.

·    Cash capital expenditure loweredto $20bn or below for 2020 from a planned level of around $25bn.

·   It expected to book between $400mn and $800mn in post-taximpairment charges in its Q1 of 2020.

Sinopec

Will trim capital expenditures in 2020 by2.5% and plans to spend 143.4bn yuan ($20.21bn) as below:

·    Refining units will reducespending by 9bn yuan from 2019 level to 22.4bn yuan.

·   Sales division down by 7.6bn yuan.

However, capital expenditures for its petrochemicalsector will increase by 9.9bn yuan to 32.3bn yuan.

Sonatrach

Will halve its planned investments to $7bn,as well as cuts its public spending by 30%.

Suncor Energy

Will cut C$1.5bn (US$1.03bn) from its 2020capital expenditures budget, bringing it between C$3.9bn and C$4.5bn.

Talos Energy

Announced $340mn expense cuts.

TechnipFMC

Will cut its 2020 capital expenditure planby 30% to $300mn. $100mn in annualised cost reductions for surfacetechnologies. $30mn in annualised cost reductions to corporate expenses.

Total

The company will shave more than $3bn offits planned investments in 2020 to under $15bn. Its operating costs willreduce by $800mn from 2019 level.

Tullow Oil

The group is being restructured as below:

·    35% of the employees willleave for a cost reduction of about $200mn.

·    45% reduction in theexploration budget.

·   30% cut in capital expenditure to $350mn.

Vermilion Energy

Will reduce its 2020 capital budget byC$80-100mn, to C$350-370mn.

Viva Energy

The company slashed its 2020 capitalexpenditure to between A$60- A$80mn, below from its earlier of A$140-$160mn.Viva Energy also deferred A$680mn share buyback.

Whiting Petroleum Corp

·    Mid-March announced thatwill cut its 2020 CAPEX by 30% or $185mn, dropping its total capital budget tobetween $400-435mn.

·   01 April became first major bankruptcy of oil-price crash andfiled for Chapter 11.

Wintershall

Will cut its 2020 investment by a fifth to1.2bn to 1.5bn euros and suspend its dividend until further notice.

Woodside

Has announced an approximate reduction of50% in total expenditure for 2020 to $2.4bn as below:

·    An approximately $100mnreduction in operating expenditure.

·    60% reduction in investmentexpenditure to $1.7–1.9bn.

·   Reducing overall exploration expenditure by about 50% to $75mn.


As indicated in Table 1, many oil and gas upstream and midstream companies have decided to slash their capital expenditures for growth projects to preserve cash. As reported by Global Data , over $50bn in capital expenditure are being slashed by oil and gas companies until the end of March 2020. According to IHS Herold calculations, North American E&P companies plan to reduce spending in 2020 by 36% or $24.4bn relative to 2019 levels .

Moreover, some companies had to cut or suspend their share buy-back and dividend pay-out plans, and general overhead costs to bolster cash reserves and subsequently should limit the negative credit rating actions. Among recent expense reductions, giant companies such as Aramco, BP, Chevron, ConocoPhillips, Eni, Equinor, ExxonMobil, OMV, Petrobras, Schlumberger, Shell, Total, and Woodside have also announced budget cuts by up to 30%.

The low oil and gas prices environment, which is a significant challenge for the industries, will lead companies to postpone their projects if prolonged. Although the Final Investment Decisions (FIDs) for the projects are dependent on demand at least over the next five years, it is not clear how long the current low prices, and continues decline in demand will last.

Investment decisions and economics of LNG projects across the world would be affected by declining oil prices since most of the long-term LNG contracts are linked to oil prices. On this matter, thus far the majority of FIDs planned for 2020 and to some extend for 2021, will not take place and hence oil and gas projects that were supposed to start up in 2023-2025 are being delayed.


The impact on LNG projects

2019 was a record year for LNG FIDs, with six projects totalling nearly 71 mtpa in new capacity being approved and sanctioned in the US, Mozambique, Russia and Nigeria, all aiming to come online between 2023 and 2025, reflecting confidence about mid- to long-term LNG demand growth.

Table 2. LNG projects taking FIDs in 2019

Country

Project

Operator

Volume(mtpa)

Startup

Mozambique

MozambiqueLNG-1

Anadarko

12.88

2024

Nigeria

NLNG

NNPC

7.6

2024

Russia

Arctic LNG-2

Novatek

19.8

2023

UnitedStates

GoldenPass

EXXON,QP

15.6

2025

UnitedStates

SabinePass T6

Cheniere

4.85

2023

UnitedStates

CalcasieuPass

VentureGlobal

10.08

2023

Total

70.81

Source: GECF Secretariat based on data from the GECF GGM and Wood Mackenzie

About 239 mtpa capacity was planned for taken FIDs in 2020 (see Table 3). Mega-LNG projects, including but not limited to Mozambique's Rovuma (15.2 mtpa), Qatar’s North Field Expansion (49 mtpa), the US Louisiana Driftwood and Lake Charles (27.6 mtpa and 16.45 mtpa), and Texas Rio Grande (27 mtpa) LNG projects, before crash in oil prices were in advanced stages of securing FIDs.

Australian mega-LNG projects have taken the most drastic reduction measures. It is expected that major projects in the country will be pushed back, since it is risky to finance projects without offtake commitments. LNG projects were targeting FIDs worth over $50bn between 2020 and 2025. These include the Pluto expansion and backfill projects such as Browse, Scarborough, Barossa, Equus, Crux and Clio-Acme. Just two Scarborough and Barossa LNG projects, worth a combined $22bn, were targeting FID in 2020. But due to the global economic downturn, Australia's biggest LNG exporter, Woodside, is postponing FID on its Scarborough Pluto Train 2 and Browse LNG projects .

In addition, Shell and its joint venture partners (Osaka Gas and a unit of Seven Group Holdings) have decided to delay a FID on the Crux gas field project . The project has been awaiting development to supply backfill gas to the Prelude FLNG facility off northwest Australia, which is the world’s biggest FLNG platform.

In the US, Shell is also withdrawing from the three trains – a 16.45 mtpa – of the Lake Charles LNG project in Louisiana . Oil and gas producer Devon Energy also delays its Eagle Ford shale operation in southwest Texas .

ExxonMobil has pushed back for the second time from its plan to take a FID on the Rovuma LNG project , and Qatar Petroleum announced that the company is not scaling back a plan to build six new LNG trains. However, the start of production from its new gas facilities will be postponed until 2025 .

Table 3. LNG projects awaiting FIDs in 2020, but most FIDs pushed back

Country

Project

OriginalFID

NewFID

Operator

Volume(mtpa)

Startup

Australia

Pluto expansion T2

2020

2021

Woodside

4.3

2024

Australia

Browse LNG T1-T3

2020

na

Woodside

11.7

2024-2025

Canada

Woodfibre

2020

2021

Pacific Oil & Gas

2.1

2024

Canada

Goldboro LNG

2020

na

Pieridae Energy

10

2023

Mauritania-Senegal

Greater Tortue Phase 2

2020

2022

BP

3.8

2025

Mauritania-Senegal

Greater Tortue Phase 3

2020

2023

BP

3.8

2026

Mexico

Energia Costa Azul

1Q 2020

2Q 2020

Sempra

2.4

2024

Mozambique

Rovuma LNG

2020

2021

ExxonMobil

15.2

2025

Papua New Guinea

PNG LNG expansion

2020-2021

na

ExxonMobil

2.7

2024

Papua New Guinea

Papua LNG

2020-2021

na

Total

5.4

2024

Qatar

Qatar expansion

2020-2021

3-6 Month delay

Qatar Petroleum

49

2025-2024

Russia

Obskiy LNG

1H 2020

2H 2020

Novatek

5

2022-2023

United States

Corpus Christi phase 3

2020

na

Cheniere

10

2024

United States

Rio Grande LNG

2020

2021

NextDecade

27

2024

United States

Port Arthur

2020

na

Sempra

13.5

2024

United States

Driftwood LNG

2020

2023

Tellurian

27.6

2024

United States

Freeport T4

2020

na

Freeport LNG

4.5

2024

United States

Plaquemines LNG

2020

na

Venture Global

10

2024

United States

Lake Charles

2020

2021

Energy Transfer

16.45

2025

United States

Annova LNG

2020

na

Excelon

6

2024

United States

Commonwealth LNG

2021

na

Commonwealth

8.4

2024

Total

238.85

Source: GECF Secretariat based on data from the GECF GGM, Hellenic Shipping News, Poten & Partners, and Natural Gas World

Sufficient investment in the development of natural gas is necessary

According to the GECF Global Gas Model (GGM), global LNG demand reached up to about 355 mt last year, and demand will increase to about 470 mt in 2025. The Asian LNG market is expected to remain the largest regional market. China has imported slightly more than 60 mt LNG in 2019, after Japan with 77.3 mt LNG. In 2025, China and Japan will be importing about 87 mt LNG and 72 mt LNG, respectively.

Investment delays in LNG projects could limit liquefaction capacity and create a significant shortfall in production levels over the medium-term. LNG demand growth outpaces liquefaction capacity, and delays in project sanctioning will affect the development of LNG regasification infrastructure and LNG to power plant projects, especially in Asia.

Sufficient investments through the entire gas value chain are necessary to sustain the security of demand and supply of natural gas. Security of supply has mutual benefits for both producers and consumers. Long-term supply contracts provide buyers with increased energy security and minimize risk for producers when making large scale, long-term investment decisions. Thus far, oil and hybrid pricing mechanisms served over imported volumes of natural gas on the global markets. Oil-indexation supports protection for natural gas and LNG exporters.

That being said, barriers impeding natural gas to play its role in the transition to sustainable energy systems, such as several banks and institutions (e.g. the World Bank and the European Investment Bank) decision to stop financing oil and gas projects by 2021, is not only be considered as an additional risk for the gas industry but also will hurt the commitments of support the UN’s Sustainable Development Goals, in particular Goal #7, as an environmentally friendly, affordable, reliable, accessible and flexible natural resource for ensuring economic development and social progress.

Policies are needed to attract investments in energy access. As stated in the 5th Declaration Summit of Heads of State and Governments in Malabo, Equatorial Guinea, the GECF Member Countries support the fundamental role of long-term gas contracts, as well as gas pricing based on oil-indexation, to ensure stable investment in the development of natural gas resources.


Dr. Hussein Moghaddam, Senior Energy Forecast Analyst

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Expert Commentary - The Consequences of Low Oil Prices on Investments  Doha, Qatar
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