By Charles Ellinas
The combined effect of the massive decline in global oil and gas demand due to Covid-19 depressing the global economy, and the rapid drop in the oil price – due to unrestricted increase in production by Saudi Arabia and Russia and still high shale-oil production – are forcing the oil and gas companies on the retreat.
By Friday, Covid-19 had infected more than 585,000, resulting in over 27,000 deaths worldwide, and the numbers are still rising. It will probably last well into 2020, but it is difficult to say how long. The last Sars virus took more than eight months before it burned itself out. Covid-19 seems to be substantially more infectious than Sars. Its impact on what was already a weak global economy and oil and gas demand is expected to last into 2021.
The International Energy Agency (IEA) forecasts that oil demand may drop by up to 20 per cent during 2020 and may not to recover until 2021.
In recent memory the world experienced oil-price wars in:
- 1985 lasting 13 months – the Brent crude price went down by 46 per cent and it took four years for oil prices and investments to recover
- 1997 lasting 17 months – the Brent crude price went down by 36 per cent and it took three years for oil prices and investments to recover
- 2014 lasting 22 months – the Brent crude price went down by 58 per cent and it took four years for oil prices and investments to recover.
But this year the oil price dropped by 65 per cent, rebounding to only about $25/barrel now. Based on past history, the 2020 oil-price war will not end soon. And if global oil supplies increase further, as Saudi Arabia and Russia threaten to do by April, oil prices may drop to $20/barrel.
These unprecedented developments are having a huge impact on the main oil and gas players operating in the East Med and in Cyprus’ EEZ. They have all been forced to re-evaluate their operations and take appropriate steps to reduce significantly capital and operating expenditures – capex and opex – for the remainder of this year and probably beyond. Given low prices, they will also be prioritising low production-cost projects that result in immediate returns – but even then they will wait for market recovery.
ExxonMobil announced last week that it is looking at reducing its 2020 spending significantly, notifying its contractors and vendors accordingly. Its share value has dropped by about 50 per cent since the start of the year.
The company has slowed down its US shale-oil production. It is also likely to delay its $30billion Rovumba LNG project in Mozambique as part of its spending cuts, but also due to the depressed global LNG markets as a result of Covid-19 and the expectation that LNG supplies are likely to rise sharply by 2025.
The same applies to the expansion of Qatar LNG, where ExxonMobil is partnering Qatar Petroleum.
Shell also announced major cuts and suspension of its share buyback programme, prioritising financial resilience. It will be reducing its opex over the next 12 months by $3-4billion in comparison to 2019. It is also cutting 2020 capex from $25billion to $20billion, while embarking on material reductions in its working capital.
Eni has cancelled its share buyback and is cutting its 2020 investments sharply in line with new prices. It experienced a 55 per cent drop in its share price this year.
In the meanwhile, it announced that it is reviewing its planned activities in 2020 and 2021, as well as all its energy projects in the Middle East, with a plan to reduce 2020 capex by $2billion and opex by $400million. Eni also said that it is postponing the start-up of new projects.
Total has announced a 20 per cent cut in its planned 2020 spending and has suspended its share buyback programme. It has announced capex cuts of over $3.3billion and $800million reductions in opex costs in comparison to 2019.
Noble Energy’s share value dropped by 75 per cent since the start of the year. This makes getting loans from banks more difficult and more expensive. As a result, the company will be deferring many 2020 activities and could experience difficulties in investing further in the East Med, which could affect its future development plans.
It has already announced a 30 per cent reduction to its 2020 planned capex, but this may now be reduced further.
Delek Group is in real trouble. The company is highly indebted and there is increasing uncertainty whether it will be able to pay off or refinance its $2.5billion debts. Since beginning of March the company lost more than 80 per cent of its value.
The Tel Aviv Stock Exchange has placed the group on its credit watch list “until further and specific information is obtained about the available sources to the company to pay-off its debt over the next two years.”
However, it is thought that Delek Group has “a certain degree of financial flexibility to realise some of its assets”, even if oil prices are low due to market conditions.
Impact on Exploration & Production (E&P)
These are massive spending cuts that will not only influence current E&P plans by the oil and gas companies, but also their investment plans over the next two to three years. If Brent crude remains below $30/barrel, spending on new oil and gas projects could fall by about two-thirds this year, and even more by 2021.
Projects that have already achieved FID may continue, but others face substantial delays.
Oil companies are yet to announce any revised plans for their East Med operations, but given the extent of their spending cuts, their activities in the region are likely to experience substantial delays and postponements.
In the meanwhile, Turkey appears to be bent on taking advantage of the developing situation, to maintain its claims in the limelight. Not only does Yavuz continue drilling in Cyprus’ block 8 to the end of April, but with the acquisition of a new drilling vessel, Turkey also appears to be determined to continue the exploration and drilling programme it announced last December.
Given past history, the oil companies may not resume exploration activities that quickly. And once they do, possibly in two-three years, their priorities will be very different, with Cyprus’ EEZ likely to be low down on their lists. Recovery will be a slow process.
Dr Charles Ellinas is a senior fellow at the Global Energy Centre of the Atlantic Council @CharlesEllinas