Oil majors are preparing for price below $20 suffer delay

The wave of oil industry spending cuts continues, with the majors now announcing significant reductions to spending as oil remains stuck in the $20s.

Royal Dutch Shell said on Monday that it would cut spending by 20 percent, or about $5 billion, and also suspend its share buyback plan. French oil giant Total SA and Norway’s Equinor announced similar moves.

Exxonmobil and Chevron have suggested they too would be axing their budgets, with Exxon under particular pressure.

These cuts will definitely affect the projects already scheduled for takeoff in Nigeria. It could delay the start ups for the deepwater projects such as Bonga Southwest Aparo, operated by Shell, and Preowei, operated by Total, by two years to 2027 and 2025 respectively, and for Exxonmobil’s Owowo by four years to 2029.

Total said Preowei is under study with a final investment decision scheduled for 2020 or a year later. Together, the deepwater fields hold an estimated 1.5 billion barrels of oil, and could add 300,000 bpd of oil.

However Seplat petroleum Development Company plc, a leading Nigerian independent oil and gas company says it will remain very profitable even at lower oil prices given its low production costs and strong investments in gas.

The Chief Executive Officer of the company, Austin Avuru, said this to the investment community and analysts upon the release of

Seplat’s audited results for the financial year ended 31 December 2019 on Monday.

Avuru said: “As we enter a challenging phase for the global economy, Seplat will benefit from being a resilient company built on the solid foundations of prudent financial management and the careful mitigation of risk. We have previously been tested by crisis.

“We successfully navigated the twin challenges of the 2014/2015 oil price shock, which was immediately followed by the 16-month Trans Forcados shut-in, which drastically reduced our liquids production.

“Thanks to our flexibility in managing cash flows we emerged a stronger and better-funded company, ready to take advantage of new opportunities. Compared to those difficult periods, today’s Seplat has more cash on its balance sheet and is even more robust and diversified thanks to our continuing investments in gas, with its long-term contracts and independence from oil price volatility. We are a low-cost producer and will continue to manage our finances prudently”.

Goldman Sachs estimates that Chevron needs $ 50 per barrel in order to cover spending and its dividend. Exxonmobil, on the other hand, needs something like $70.

The majors are relatively more insulated from the downturn than small and medium-sized shale drillers because they have downstream refining and petrochemical assets that have typically performed somewhat better than upstream units when prices fall.

Refineries, for instance, spend less on oil during the downturn, and low prices also translate into a boost in sales of refined products.

“But the majors do not have that cushion this time around. We are in the midst of a historic meltdown – a supply crisis and a demand event with no precedent. Estimates vary, but oil consumption could be off by 10 million barrels per day (mb/d), or more. It doesn’t matter how cheap crude is, if people are not driving, flying or consuming anything aside from the bare essentials, there is no demand boost from low prices”, Goldman Sachs stated.

Exxon has also cut 1,800 contractors from the site.

The first round of spending cuts from the oil industry is now visible, but a second round is beginning, according to a report from Goldman Sachs.

Rystad Energy put out a similar estimate on Monday. E&PS are likely to cut project sanctioning by up to $131 billion, or about 68% year-onyear, according to the Oslobased firm. “Upstream players will have to take a close look at their cost levels and investment plans to counter the financial impact of lower prices and demand.

Companies have already started reducing their annual capital spending for 2020,” says Audun Martinsen, Rystad Energy’s Head of Energy Service Research.

It’s anybody’s guess how low WTI and Brent go. But more than a few analysts have pointed to the potential for storage to max out as a reason why prices have more room to fall. “[N]o one can exactly be sure that production will be shut-in fast enough to not overwhelm our ability to store oil,” JBC Energy said in a note.