How the worst oil price crash in history changed the upstream industry

worksite ltd 7syIOxlLpfA unsplashThe oil price crash has wiped US$1.6 trillion off the valuation of the global upstream industry, according to the research and consultancy group Wood Mackenzie

The Middle East region is set to see a sharp drop in imminent FIDs and 2020 capital expenditure will be US$16 billion lower than the pre-crash view.

In total, the WoodMac have removed US$50bn of investment (2020 terms) from its outlook for 2020-25 because of project delays and cost-efficiency measures. However, deep investment cuts do not offset the valuation impact of lower production (OPEC+ cuts) and oil prices.

Andrew Pearson, vice-president, upstream, said, “This figure captures the impact of Wood Mackenzie’s downgraded long-term Brent price assumption – now US$50 per bbl (2020 terms), rather than the previous US$60 per bbl – and much more.

Since the crash:

-Global upstream development spend for 2020 is 30 per cent lower than the pre-crash view. North America is hit hardest; along with Africa and Asia. These regions may never recover to pre-crash levels.

-Only nine major FIDs are expected in 2020 versus its pre-crash view of around 50 new project approvals.

-OPEC+ oil production cuts and market-driven shut-ins reshape near-term supply outlook.

-Valuations for oil sands and heavy oil hit hardest in percentage terms – down more than 50 per cent – but more than US$1 trillion was wiped off conventional onshore and offshore projects.

-More than 40 per cent of future projects now generate an IRR of less than 15 per cent.

-Tight oil and heavy oil cash flows suffer the most, but overall resilience has improved since the last downturn.

Fraser McKay, vice-president, upstream, said, “The oil price crash and the market uncertainty it caused has affected all regions, all operators and all resource themes. In early March, we anticipated the industry’s response would be rapid and decisive. It has been. Tough calls have been made, despite a lack of clarity how the COVID-19 pandemic will have on oil and gas demand, both in terms of depth and duration.

“To date, cuts to expenditure have largely been in line with our expectations. New project spend has stagnated, and output has been curtailed, most notably among OPEC+ participants and in the US tight oil sector. We have also reacted quickly to reflect the latest view in our global upstream dataset, analysis and tools. Our Lens Upstream outlook evolved as the price plummeted, culminating in the data here.”

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