COVID-19 to drag down capex for exploration and production

Global capital expenditure (capex) for exploration and production firms (E&Ps) is expected to drop by up to $100 billion this year, about 17 percent versus 2019 levels, local media reports with reference to Rystad Energy, an independent energy research and business intelligence company.

The estimates as based on Rystad Energy’s updated base case scenario of $34 per barrel in 2020 and $44 per barrel in 2021.

E&P capex in 2019 reached $546 billion according to Rystad Energy estimates, having slightly recovered from a 2-year slump in 2015 and 2016 before diving to around $510 billion from 2014’s historical high of $880 billion.

According to the company’s data the expected decline this year will make 2020’s capex volumes, estimated at about $450 billion, the lowest in 13 years. "Our estimates before the coronavirus epidemic had indicated E&P would remain flat year-on-year."

As April approaches, when OPEC+ producers are expected to flood the market with even more additional oil, Brent prices are now at nearly $25 per barrel and are likely to decline even further, according to Rystad Energy.

"In a low case scenario, where Brent averages $25 in 2020, global investments may plunge to around $380 billion this year, falling to almost $300 billion in 2021, a 14-year and a 15-year low respectively."

"As companies are now losing solid oil market ground for a second time in recent years, it will be far more challenging to act quickly and reach the same high level of investment revision without taking a heavy toll on E&P’s performance," says Rystad Energy’s upstream analyst Olga Savenkova.

The estimated cost cuts will be mainly achieved by lower activity within US shale, delays to projects that are yet to reach the final investment decision (FID) stage, deferred exploration activity, and cost cuts within development and production for conventional assets, reads the report.

"As the most flexible of the supply segments in terms of cost reduction, US shale players are expected to reduce their investments by about 30% year-on-year. These measures will be quickly reflected in the oil market supply, with shale oil supply growth set to slow down in 2020."