COVID-19: Oil companies take budget cut to survive holocaust
As the world battles to contain the deadly coronavirus with deaths hitting over 10,000 as at last week, the global economy appears to have nosedive as the oil industry takes the worst shock with prices on free fall, and currently trading below $30 per barrel.
In line with that development many International Oil Companies (IOCs) and indigenous operators across the world have taken to scale down their operations as demand for oil from Asia and Europe continue to dwindle by the day, just to remain in business.
In China, most of the big companies that consume oil for their day-to-day activities had all shut down operations in a bid to curtail the coronavirus. But in a bid to avoid a total shutdown of the oil industry, countries and companies are beginning to cut corners to keep the industry alive with both capital expenditure, working and operating budgets taken quite some hit.
While for instance, Saudi Arabia and Iraq have opted to sell crude oil at discounted rates ranging from $5 to $8 several oil companies are scaling down on their exploration, production and new projects budget.
Nigeria has equally joined the league of nations offering discounts on crude oil in a bid to woo buyers to patronise it, having earlier announced that about 50 cargoes of its crude oil were stranded.
Nigeria slashes crude prices
Nigeria on Monday, before releasing its May loading programme cut the official selling prices for its crude oil to record lows to clear a glut of unsold April-loading cargoes. The country has had to grapple with an unprecedented excess of oil triggered by the coronavirus outbreak and a price war between Saudi Arabia and Russia for market share.
The Nigerian National Petroleum Corporation cut its April official selling prices for Bonny Light and Qua Iboe by $5 per barrel to dated Brent minus $3.29 and minus $3.10 per barrel, respectively.
Brent crude, the international benchmark, has since fallen by over 60 per cent from January this year. It stood at $26.44 per barrel as of 7:40pm last Monday.
May loading programmes emerged with key grades seeing an increase over the previous month, Reuters reported on Monday.
Bonny Light and Forcados are both higher and due to load 245,000 barrels per day, Bonga 123,000 bpd and Qua Iboe 215,000 bpd. There will also be two cargoes each of Usan and Yoho, five cargoes each of Brass River and Agbami, six of Egina and four Amenam, according to the report.
The Group Managing Director of the Nigerian National Petroleum Corporation, Mallam Mele Kyari, recently admitted the country was already struggling to find buyers for its crude oil, with over 50 cargoes were yet to be sold.
The unsold cargoes represent more than 70 per cent of the country’s total oil exports and puts it in a very difficult spot, according to S&P Global Platts.
Kyari said Nigeria’s crude cargoes had been stranded due to the higher selling price compared with its fellow OPEC members such as Saudi Arabia and Iraq, which could afford to offer discounts of around $5 to $8 per barrel to buyers.
Shell cuts operating, working capital costs
Chief Executive Officer of Royal Dutch Shell, Ben van Beurden, said last week that it has embarked on a series of operational and financial initiatives expected to result in; reduction of underlying operating costs by $3-4 billion per annum over the next 12 months compared to 2019 levels; reduction of cash capital expenditure to $20 billion or below for 2020 from a planned level of around $25 billion; and material reductions in working capital.
In order to deliver sustainable cash flow generation, he said Shell is actively managing all our operational and financial levers – from focusing on maintaining safe and reliable operations each day to reducing capital spend and operating expenses. Together, he said, these initiatives are expected to contribute $8 – 9 billion of free cash flow on a pre-tax basis, adding that Shell is still committed to its divestment programme of more than $10 billion of assets in 2019-2020, with timing depending on market conditions.
The company said as the COVID-19 virus spreads across the world – seriously impacting people’s health, our way of life and global markets – Shell is putting the safety and health of our people and customers first, along with the safe operations of all our businesses. At the same time, it said it taking decisive action to reinforce the financial strength and resilience of its business so that it is well-positioned for the eventual economic recovery.
‘‘As well as protecting our staff and customers in this difficult time, we are also taking immediate steps to ensure the financial strength and resilience of our business. The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past.
In these very tough conditions, I am very proud of our staff and contractors across the world for maintaining their focus on safe and reliable operations while also ensuring their own health and welfare and that of their families, communities and our customers.”
Chevron joins race to cut spending
Amidst the rising effect of COVID-19 on businesses, Chevron last week also announced actions in response to market conditions.
Some of its key business decisions included; a 20 per cent 2020 capital spending reduction plan by $4 billion, permian production guidance reduction by 20 per cent.
Others are; suspension of share repurchases, adding that the actions protect the dividend, prioritize long-term value, and support industry leading balance sheet
“With an industry leading balance sheet and a flexible capital program, we believe Chevron is resilient and positioned to withstand this challenging environment,” said Chevron Chairman and CEO Michael Wirth. Given the decline in commodity prices, we are taking actions expected to preserve cash, support our balance sheet strength, lower short-term production, and preserve long-term value.” The company, he said, is reducing its guidance for 2020 organic capital and exploratory spending by 20 per cent to $16 billion.
Reductions, he said, are expected to occur across the portfolio and are estimated as follows;
•$2 billion in upstream unconventionals, primarily in the Permian Basin
•$700 million in upstream projects and exploration
•$500 million in upstream base business spread broadly across our U.S. and international assets
•$800 million in downstream & chemicals and others.
He explained further that cash capital and exploratory expenditures are expected to decrease by $3.3 billion to $10.5 billion in 2020. Total capital and exploratory spending in the second half of 2020 is expected to be about $7 billion, an annual run rate 30 per cent lower than the approved budget announced in December 2019.
‘‘Excluding 2020 asset sales and price related contractual effects, the company expects production to be roughly flat relative to 2019. Note that Chevron’s net production increases about 20 thousand barrels of oil equivalent per day for each $10 movement lower in Brent oil prices due to contractual effects. Permian production by the end of the year is expected to be about 125 thousand barrels of oil equivalent per day, or 20 per cent, below prior guidance.’’
‘‘The flexibility of our capital program allows us to respond to these unexpected market conditions by deferring short-cycle investments and pacing projects not yet under construction,” said Jay Johnson, Executive Vice President of Upstream.
“At the same time, we are focused on completing projects already under construction that will start-up in future years while preserving our capability to increase short-cycle activity in the Permian and other areas when prices recover.”
In addition to reducing capital expenditures, the company is taking other actions to support its industry leading balance sheet including:
•The $5 billion annual share repurchase program has been suspended after repurchasing $1.75 billion of shares during the first quarter.
•The company completed the sale of its interest in the Malampaya field in the Philippines with proceeds over $500 million received in the first quarter. In April, the company expects to close the sale of its upstream interests in Azerbaijan and its interest in a related pipeline.
•The company continues to execute its plans to reduce run-rate operating costs by more than $1 billion by year-end 2020.
“Chevron’s financial priorities remain unchanged,” said Chevron Chief Financial Officer Pierre Breber. “Our focus is on protecting the dividend, prioritizing capital that drives long-term value, and supporting the balance sheet.”
Seplat cuts cost by 30%
Major Nigerian independent oil and gas firm, Seplat Petroleum Development Company Plc, is looking to cut costs by at least 30 per cent to counter a crash in crude prices, its Chief Financial Officer, Roger Brown, has said.
Brown said that the company’s cuts, which would ideally be higher in the short term, would see its drilling plans reduced to three wells from the 15-20 it had planned.