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Evercore Predicts Collapse in Global E&P Spending

-By Gideon Osaka

There are fears that global exploration and production, E&P expenditures will decline 27 per cent in 2020, a 3,000-bps (basis point) turnaround from the 2 per cent increase in spending anticipated in December.

This ends three straight years of modest growth since 2016, with the net cumulative gain at 16 per cent off the 2016 trough but still 39 per cent below the 2014 peak. Earlier expectations for a fourth straight year of modest improvements in 2020 have reversed course. We now forecast global E&P spending to establish new lows that are 16 per cent below the 2016 trough and 55 per cent below the 2017 peak. Global E&P spending is now back to 2005’s level, Evercore stated. It also explained that Africa is expected to lead international capital expenditure, CAPEX, declines at 43 percent, followed by Russia/FSU/Eastern Europe and Western Europe tied for second place with near-30 per cent contractions in spending. CAPEX is also falling significantly in Latin America, down 24 per cent, while spending in Asia and the Middle East is experiencing relatively modest CAPEX cuts in the mid-teens. By operator types, independents are cutting swiftly, down near 25 per cent, while majors are 17 per cent less.

International CAPEX was said to have contracted in 10 of the last 36 years by an average 2 per cent, with four contractions in the past six years ranking among the worse downturns. International E&P CAPEX also has fallen 13 per cent below the 2017 trough and is 48 percent below the 2014 peak, reverting back to 2006/2007 levels. According to Evercore, offshore rig count crashed through bear estimates. The near-30 per cent swing in international CAPEX spending plans is evident offshore, where both the floating and shallow-water rig counts have fallen from their March peaks. “Offshore spending tends to be stickier, given the complexity of these projects relative to land-based activity, and we had expected activity to hold up better. However, with COVID-19 travel restrictions further raising offshore costs, operators were quick to terminate contracts, defer rig tenders and relinquish exploration programs. Progress on recently approved development projects slowed, as rigs were put on standby and operators sought CAPEX cuts and pricing concessions across service and product lines. As a result, both the floater and jackup rig counts fell quickly over the past few months, and rig contractions have re-accelerated attrition.”
Evercore explained that it expects spending by some African companies to decline 43 per cent in 2020, with the year-over-year decline the worst of any international region and on par with the collapse in the U.S. It had initially anticipated the same group of companies to increase capital expenditure, CAPEX 3 percent and build on the 9 per cent growth posted in 2019, which capped three consecutive years of favorable growth.

Spending was said to have increased 40 percent off the 2016 trough and recovered 16 percent of the 2012 peak. However, a 43 percent decline in 2020 will establish a new low in a survey that is 21 per cent below the 2016 trough and 52 per cent below the 2012 peak. Specifically, Evercore stated Chevron has plans to divest eight onshore and shallow-water blocks in Nigeria, while Total seeks to sell its 12.5 percent stake in Block OML 118 that includes the prolific Bonga, Bonga Southwest and Aparo fields. ExxonMobil is also looking to sell assets in Nigeria and Chad. As a result, there is no anticipated recovery in E&P spending for Africa in the near term, it stated.

Evercore also explained that it expects spending by select Middle Eastern companies to fall 12.5 per cent on a year-over-year basis for 2020, down from anticipated growth of 8 per cent in its December report. The sharp decline in oil prices in March commanded an immediate response, and Saudi Arabia implemented plans to cut production to 7.5 million barrels per day, MMbopd, or 40 per cent from April levels, while the UAE and Kuwait joined in with cuts of 180,000 bopd.

“We believe companies in the region are implementing 10 per cent-to-20 per cent reductions across their upstream activities, with the overall E&P CAPEX down 12.5 percent, as several of the largest players remain committed offshore. For example, Saudi Aramco is moving ahead on a new shipyard to manufacture jackups and land rigs. We expect regional E&P CAPEX to end the year 5 per cent below 2017 levels and 29 per cent below the 2014 peak, back toward the 2012/2013 level.

“Saudi Aramco is weighing bids for new long-term offshore maintenance contracts involving its huge Marjan oil field, which could be valued at $1.5 billion to $2 billion annually. However, the Kingdom deferred plans to FID the $5-billion Zuluf field until at least fourth-quarter 2021. Meanwhile, ADNOC has plans to expand Al Dabbiya and Umm Al Dalkh oil fields, with new EPC tenders issued, despite delaying the $20-billion Hail and Ghasha sour gas project.

“In contrast, Qatar Petroleum is moving forward with its LNG expansion strategy and has signed $19 billion of contracts with three South Korean shipyards to build 100 LNG carriers through 2027. Despite the global LNG glut, the company plans to expand its North Field’s LNG production capacity from 77 MTPA currently to 126 MTPA by 2027. Meanwhile, BP is in early-stage discussions to sell a 10 per cent stake of its total 60 per cent interest in the Khazzan natural gas field in Oman for an estimated $1 billion,” it added.