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This is the second article in a three-part series covering
the impact of low oil prices on global integrated oil companies.
Did you miss part one? Read our analysis on
weaker balance sheets for GIOCs.
Conventionals have accounted for about 90% of current production
in aggregate. This blog post takes a look at different scenarios to
help portray the outlook and how different oil price scenarios
might impact the longer term supply outlook.
Global conventional oil and gas production, in aggregate for
this group, shows a convergence in terms of the impact across all
these different scenarios. If we look at production for 2020
through 2021 and 2022, we see a relatively muted supply impact,
even as we take into account very extreme, different scenarios.
Under an extreme scenario whereby there is an indefinite halt to
all future FIDs, aggregate peer group conventional oil and gas
output would remain flat through 2021, before declining at a 4%
compound annual growth rate thereafter. A $40/bbl oil price would
lead to relatively flat output through 2023, assuming continued gas
project sanctioning. Assuming a one-year delay to all oil and gas
FIDs through the mid-2020s, conventional output would fall by 2%
between 2019 and 2024, rising thereafter.
Figure 1: GIOCs: Global conventional production
outlook
There are a few factors driving the conventional supply story.
It's also important to note that this outlook is in stark contrast
with the unconventional picture where we're likely to see a much
more immediate supply impact.
One consideration is most sanctioned conventional projects are
likely to continue progressing, just given the capital and
operational resources that have already been committed and
deployed. We believe it's likely that we'll see a few delays to
these projects. We could also see situations where sanction
projects get deferred by a few quarters as companies look to defer
any spending that might be flexible. But, for the most part, we are
assuming that the majority of these volumes go ahead on
schedule.
The other thing driving that short-term impact is that we expect
most of the existing production to remain online. For any of these
companies to shut in existing production, we would need to see
steep and sustained price declines.
If you look further out the curve, you start to see more of a
divergence across these different scenarios largely based on
breakeven prices. Assuming a flat $30 oil price scenario, all
projects that are economic at those levels go ahead and we see a
muted impact. We don't have a whole lot of projects in these
companies portfolios that are economic at those levels. For the
next scenario, oil projects with break-evens below $40 go ahead, we
have a flatter decline. In fact, with production remaining flat, we
make it towards the middle of the decade before it starts to
decline. We have more projects that are economic in that price
range. It's not until we get to the $50 price where we actually see
some growth.
Finally, we assumed a blanket one-year delay to all FIDs for all
the oil and gas projects in our portfolio. And in that case, we do
see a near term decline sort of through 2023 and 2024 before
production starts to pick back up and reach normalized levels by
the end of the decade.
If we look at these different scenarios and diversions across
these different outlooks, it really highlights the challenges that
these companies are facing with respect to their conventional
portfolios. In short, these operators have much more flexibility to
adjust capital and drilling decisions based on short term market
fundamentals.
In particular, if we're talking about Greenfield conventional
projects, we're looking at sort of a three to five-year lag time
between a final investment decision and first oil or first gas.
That means companies need to maintain a longer-term view of oil
prices. The question for these companies is not "what is the oil
price today", but "what will the oil or gas price be when this
project comes online?"
There are other considerations beyond just project break-even
prices that will impact final investment decisions. So, we'll
continue to monitor those developments and adjust our outlooks.
Production portfolios have become increasingly
resilient
GIOCs have increased the resilience of their portfolio
significantly in recent years, particularly following the 2014
price declines. An array of elements came into play to make company
portfolios more efficient, including cost reductions, project
redesigns, prioritization of higher quality projects and
divestitures of non-core assets. All of these have made the overall
portfolio more resilient to a low-price environment.
Figure 2: Unsanctioned new source conventional volumes
(2020-29), by hydrocarbon and break-even price
We see significant discrepancies within the portfolio—more
than half of the oil volumes that we see in these unsanctioned
portfolios are tied to projects with a break-even above 40. That
said, if we factor in the gas projects that we see as being
economic and going ahead in the current environment, we get to a
situation where about two thirds of the unsanctioned oil and gas
portfolios for these companies are economic in a $40 oil price
environment.
Challenging Economics for Project FIDs
One of the critical ways we gauge the pulse of the industry in
challenging times such as these, is to assess the commitment of
IOCs to capital spending (FIDs). Upstream projects for final
investment decision face a double whammy of challenges: a low oil
price that has shaved off a significant amount of their economic
value and project delays that could erode further value.
Figure 3:Future spend commitment by approval year and
top 10 projects slated for FID in 2020
At the turn of the year (pre-COVID-19), with the oil price in
the lower $60/bbls, we had a forecast where the aggregate value of
FID approvals for 2020 would be approximately 20% higher than 2019
figures (at approx. $215 billion). Unfortunately, the drop in the
oil price makes that forecast untenable, and so we have revised our
forecast as shown in figure 5.
Under the current reality, where the oil price is languishing at
sub-$40/bbl levels, our forecasts show that approx. 85 - 95% of
FIDs for this year are at risk of being deferred or postponed. Many
of the projects that will be impacted by these deferments are large
oil, large gas-to-power and gas-to-LNG developments, which are
capital intensive, and have high economic break-even prices.
Figure 4: Net present value of selected projects at $60/bbl and
$40/bbl
To illustrate why many projects will likely face delays, in
figure 6 we have outlined the net present value analysis of several
projects at two price points $60/bbl and $40/bbl. At $60/bbl most
of the projects show relatively attractive economics (decent NPVs
and IRRs in the 20%s). With the oil price down to $40/bbl, the
economics of the projects becomes challenged -with many showing
negative NPV and IRRs. On the average, 55% of the value of key
projects was shaved off -which suggests that project cashflows will
be significantly impacted and are therefore likely to be deferred
or postponed.
In summary, many of the projects which may be deferred may come
back into consideration in 2021 and 2022, however , they will
undergo significant redesign, field development plan (FDP)
revisions, etc., to be made "fit" for the new lower oil price
world.
That said, there is a risk that for some projects, the
combination of delays, the low-price environment, and the
accelerating energy transition may mean their economics become very
challenged—thus they could become "stranded assets" and never
see sanction.
Given the constant changes in the state of the oil markets,
these various scenarios and potential outlooks for global
integrated oil companies, are in flux.
