How hard will the oil price crash hit APAC upstream investment?
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Research Director, Corporate and Upstream Research
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The global oil and gas industry faces an unprecedented challenge. The coronavirus outbreak has sent a shockwave round the world, depressing economic activity and causing a plunge in oil demand – and setting in motion a chain of events that led to the biggest fall in the oil price in 30 years.
So how will the oil market crisis affect upstream investments in the Asia Pacific region?
This was just one of the questions our APAC experts tackled in a recent webinar: ‘Navigating the oil price crash in Asia Pacific’. Listen to the complimentary replay below to hear how the crash could affect the whole oil and gas value chain. Or scroll down to read key points on the impact on upstream investments.
Webinar: Navigating the oil price crash in APAC
How will upstream operators react? What should Asian NOCs be thinking about? And how will APAC's refining and crude markets be affected? Listen to the webinar to find out more.
Pre-FID spend will be pushed back
When the oil price crashed five years ago, the industry adapted to the new environment by squeezing the supply chain, restructuring internally and divesting non-core assets. This time around, discretionary spend will be firmly in focus. The cuts will be fast and deep.
Pre-FID spend will be a key lever for companies to pull as they try to reduce upcoming capital commitments. At the start of the year, we expected Australia to lead a bumper year for Asia Pacific FIDs. Things changed quickly. Australia could now bear the brunt of deferrals, with key strategic LNG backfill and expansion projects now at risk of being pushed back.
What does this mean for the region’s output? If all pre-FID projects are deferred indefinitely, Asia Pacific could see a 2 million barrels per day reduction in supply by 2025. In reality, the reduction could be even higher as operators cut spend on assets already onstream.
Drilling plans will be under scrutiny
Many operators will have to make tough decisions about cutting spend on existing assets.
Development drilling is one obvious target, accounting for as much as 50% of upstream investment over the next two years on assets already in production. However, many of the region’s largest producing fields are mature, and require continued development drilling or extensive investment in enhanced oil recovery. In many cases, reducing production declines while cutting spend would be nothing short of Herculean.
Exploration: a difficult outlook
In our latest analysis of how Asia Pacific’s upstream sector will respond to the oil price crash, we predict that shrinking exploration budgets will mean a 30% reduction in the number of exploration wells drilled in Asia Pacific this year. This could fall even farther next year if the low oil price persists.
We expect that most explorers will delay campaigns where a rig has not yet been contracted. Deferrals could include some of the most keenly anticipated wells in Indonesia, Myanmar and Australia.
M&A: from a buyers’ market, to a ‘no buyers’ market
M&A activity will also be hit hard. We had already anticipated an oversupply of assets for sale this year, but the buyers’ market seen over the last couple of years is set to become a ‘no buyers’ market. Small, nimble acquirers will find it difficult to raise debt in the current environment, while larger operators with cash available will hold out for more signals on which way prices will go.
Bargains may surface over the coming months, but only the bold – and financially strong – will be in a position to act.
Andrew Harwood, Research Director, Asia Pacific Upstream Oil & Gas