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In this price volatile environment, we should expect a number of
key financial metrics such as the net present value (NPV) of an
asset, the project breakeven and the Internal Rate of Return (IRR)
to be moving targets. We did an analysis on the oil targeting
projects in Latin America which had an FID date (assumed or
announced) between 2020 and 2022 and the insights we gained were
very interesting.
Key takeaways from our analysis are as follows:
Oil reserves at risk of not being developed or pushed
out into the future could touch 16 billion barrels at current
commodity prices
Development capital commitments are expected to be delayed,
some related to pandemic impact
Prolonged commodity pressure should start delaying free cash
flows to the companies by years
Competitively placed assets in countries such as Brazil and
Guyana can start looking uneconomical at price stress
continues
Development capex reduction of 5% to 10% does not move
the needle to bring back momentum in activity
Costs across the value chain will need to be re-visited;
operating expenditures will also be impacted
Flexibility in readjusting government take might support
commitment to part of investment plans announced prior to the
crisis
At $50/bbl, cash flow from this selection of assets to the end
of the decade is approximately US$40 billion. That same set of
assets cumulatively do not make money at an oil price of
$30/bbl.
The recoverable reserves at risk of not being developed are led
by Brazil, followed by Mexico. Within this selection of projects
that we have analyzed, a total of 26 billion barrels of oil
reserves was expected to be developed out of which close to 16
billion barrels of oil reserves have a breakeven of $40 or above -
that is close to 60% of the total.
Figure 1: Recoverable reserves at various breakeven
prices
Figure 2: Recoverale reserves at various breakeven prices
(excluding Brazil)
When the same set of assets are analysed to understand the
impact on the capital investments, we find that close to US$65
billion could be put at risk of disappearing in the short term as
projects get delayed. The country which will be impacted most would
be Brazil. For these assets the cost of development is usually
higher because of the water depth, the presence of contaminants
such as high CO2 content, distance to coast and the fiscal terms.
The pre-salt field reservoir is high pressure, high temperature,
which leads to complexity in drilling and other technical aspects
of project development.
Figure 3: Precentage of development capex at various breakeven
prices
At 20 dollars per barrel of oil price, it will take almost till
the end of the decade for these projects to come back into the
black and provide positive cash flows to the companies involved. At
$50, the same projects were expected to reach positive cash flows
in 5 years. That is a five-year delay.
Figure 4: After tax cash flow at different oil prices
Aggressive cost cuts will be needed to revive activity in the
region. Government support with measures such as reduction in
government take could also help support the industry.
Aggressive capex reductions are necessary because, as per our
analysis, reduction in capex of 5% to 10% will not really move the
needle and make these any of these projects viable for investments.
When we reduced the capex across the selected assets by 25% at
US$40/bbl, we started to see the assets give a positive NPV across
all the countries.
Figure 5: NPV Sensitivity at different oil prices
Siddhartha Sen is a Director for the Energy Research
& Analysis team at IHS Markit.
