BAKU, Azerbaijan, June 30
By Leman Zeynalova – Trend:
Oil and gas capex declines will be significant in 2020 and are expected to exceed the level of declines experienced in the last oil price downturn in 2015-2016, Trend reports with reference to Fitch Solutions company.
“Cuts in capex for 2020 are unique in both their size and the speed at which they were undertaken. The rapid collapse in oil prices seen in March and April forced oil and gas companies to significantly curb capex and saw many enact two rounds of cuts as prices continued to decline. Since then, prices have increased by near 100 percent to $40/bbl for Brent, although optimism for increased capex is low as most firms look to remain conservative given the ongoing global economic recession and the prospects of continued impacts from Covid-19,” reads the report.
The sharp downturn in oil prices in 2020 mirrors the declines seen in 2015.
“However, if our current forecast for an annual average of $40/bbl holds for this year, Brent will have fallen more in percentage terms in 2015. As we saw in 2015 and 2016, across the board reductions in capex are being employed across all regions. 2016 saw capex plummet by 23 percent, a similar rate to what we forecast in 2020. While investment declines took place over 2015 and 2016, with capex falling in aggregate by $209.0bn, we expect 2020 declines to total $131.0 billion in a single year,” said Fitch Solutions.
The company said that the magnitude of the change in 2020 based on the lower capex totals will be more impactful on supply going forward.
“More efficient use of capital to support production and development had been a hallmark of the last downturn, as such each dollar lost in investment in 2020 will have an outsized impact on production this time around,” reads the report.
The second oil price shock in five years hits as oil and gas companies had just started to emerge from years of cost saving drives to increase efficiency, which led to strong profits in 2019, said the company.
“However, much of the cost savings were achieved at the expense of oil field services (OFS) providers and subcontractors, who did not experience the same turnaround in 2019. In 2020, with OFS pushed for more cost reductions, it seems unlikely that many of the gains seen previously are repeatable in this lower price environment. This leads us to believe the capex cuts in 2020 will have a more marked effect on output than in 2015 and 2016, where we saw some markets actually increase output with lower expenditure.”
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