BAKU, Azerbaijan, June 4
By Leman Zeynalova – Trend:
Exploration and development (E&D) expenditures will likely decline in 2020, Trend reports with reference to the US Energy Information Administration (EIA).
According to EIA estimations, global expenditures related to oil and natural gas exploration and development increased $42 billion (13 percent) for 102 publicly traded oil companies in 2019, totaling $361 billion. As a result of significant crude oil price declines in 2020, however, global proved reserves will likely be revised downward, says the EIA.
In its May Short-Term Energy Outlook, EIA forecasts Brent crude oil prices will average $34/b in 2020. If this crude oil price forecast is realized, E&D expenditures per BOE could fall to less than $10/BOE in 2020 if E&D expenditures remain at about one-quarter of the Brent crude oil price.
Proved reserves are estimated quantities of oil and natural gas that analysis of geological and engineering data demonstrates with reasonable certainty are recoverable under existing economic and operating conditions. Because crude oil prices directly affect the profitability of E&D projects, changes in the prices companies use to develop their calculation of reserves can significantly affect their proved reserves levels and the volume of reserves they can claim as additions.
The U.S. Securities and Exchange Commission requires companies listed on U.S. stock exchanges to value proved reserves at the end of a year based on the average crude oil prices from the first trading day of each month during that year. On the first trading day of the first six months of 2020, the front-month Brent futures closing price averaged $44/b, or 30% lower than the 2019 full-year average of $63/b.
When crude oil prices decline, oil companies can take impairment charges for assets that fall in value to less than the cost of developing them. Impairment charges represent the decrease in value of assets a company owns, typically its amount of proved reserves. The current low price environment suggests that the 102 companies EIA analyzed will likely post large negative revisions to their proved reserves in 2020.
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