As the steep fall in oil prices coupled with blows to global demand amid ample supplies leave oil and gas companies cutting capex and reducing activity, no area will go without scrutiny.

Analysts with Wood Mackenzie pointed out that only the most core projects will move forward while shorter cycle developments like U.S. shale will see the most dramatic investment cuts. However, some projects stand a better chance of avoiding the chopping block, and some areas could even see renewed interest.

Already, operators in the Lower 48 have cut capex in response to challenging market conditions. “We’re seeing capex budgets being revised down by 30% from original guidance,” Linda Htein, senior research manager for Wood Mackenzie, said on a webcast this week. Among these are shale player EOG Resources, which cut its capex by 30% and shifted from guidance of double-digit production growth to roughly flat compared to last year. Others like Permian operator Pioneer Natural Resources cut its budget by 45% and its rig count in half.

“That sounds dramatic, but we’ve actually seen more dramatic cuts than this,” Htein said. “Apache, for example, had eight rigs running in the Permian and they have plans to drop all eight of them.”

More cuts could be forthcoming if oil prices stay lower for longer, she warned, noting some companies such as Occidental Petroleum Corp. and Diamondback Energy have already made secondary revisions.

Source: Wood Mackenzie

Wood Mackenzie analysis shows that some companies will need to cut discretionary spending by 40% year-on-year to stay cash flow neutral at $35 per barrel (bbl) Brent.

Oil prices dropped again on March 27 as billions of people across the world remained on lockdown to reduce the spread of coronavirus. Brent crude prices have fallen nearly 46% to about $24.48/bbl, while U.S. crude has plunged 50% to $21.19/bbl since Saudi Arabia and Russia launched a price war earlier this month, Reuters reported.

Spending and activity cuts must be deep and swift to maintain cash flow neutrality, analysts say. Such cuts will likely become evident in production within months, according to Htein.

“I don’t think we’ll see a meaningful supply response until probably the third quarter of this year,” she said. “But given how quickly companies are planning to suspend activity and the shorter nature of OFS contract this time around versus the last price crash, we could see production rollover as early as Q2 of this year.”

She noted, however, that U.S. Lower 48 headed into 2020 with growth momentum with production in January nearly 1 million barrels per day more than a year earlier. Plus, the industry was coming off a year that saw lots of activity reductions as companies focused more on delivering higher returns and free cash flow, while continuing to keep costs down and improve capital efficiency.

“In terms of how quickly and how far that production could fall is really going to depend on how long the low prices persist,” she added. “If we were to assume that prices kind of average in the mid-30s Brent for the remainder of the year and then slowly recover in 2021, we think that our 2021 exit rates for the Lower 48 could be on the order of one and a half million barrels per day lower than our current production. So, a pretty dramatic decline given the events of today.”

However, there are some “interesting dynamics” on the gas side in the Lower 48—less associated gas from oil plays as producers slow down activity.

“Those higher gas prices, we think, are going to likely incentivize new drilling in dry gas plays, particularly in the northeast region and the Haynesville,” Htein said, “and that will help to balance the gas market in 2021.”

Wood Mackenzie also projects global final investment decisions will return to levels seen in 2014-2015 as some major projects could be postponed or canceled altogether. But some projects could advance, with some resource themes appear more likely than others to make the cut, according to Rob Morris, a principal analyst for Wood Mackenzie. These include deepwater oil developments, like the Exxon Mobil-led projects offshore Guyana, and low-cost greenfield projects particularly LNG projects needing feed gas to meet contractual commitments, he said.

Besides short-cycle developments, pre-FID projects are low hanging fruit for companies looking to quickly trim spending.

The number of major project FIDs fell dramatically from 2018 to 2019, and is likely to happen again this year as projects are deferred or canceled.

Source: Wood Mackenzie

Many projects break even below $50/bbl, but almost none work at $30/bbl, he said.

“Only the very strongest will even be able to contemplate making new investments,” Morris added, referring to majors and some NOCs. “Only the most strategic and the most core projects get the go ahead.

The easiest way to cut capex is by not spending on new projects and delaying the spend for the future, added Fred McKay, vice president, head of upstream analysis, for Wood Mackenzie. “Companies are very much looking at existing projects that have been sanctioned but are pre-production and even assets that are on production,” McKay said.

Source: Wood Mackenzie

“You will see every ounce of discretionary capex of all projects being revisited by these companies and the main detriment or a bottleneck to reducing activity is contractual. … There will be questions asked of those contracts to providers, concession terms sought, and in some cases, contracts will get canceled, allowing them to cut spend more rapidly than you could do by the lower hanging fruit in the equation.”