Exploration’s future still in doubtBy Peter Appleby | Mon, 05/25/2020 - 15:53
The future of oil and gas is slowly but surely becoming clearer. Oil prices have steadied at above US$30 following their historical drop into negative pricing over a year ago. Demand is picking up aided by the reopening of economies, with Spain, one of the countries worst hit by COVID-19, the latest to relax its restrictions on movement. But still, US$30 does not present a high enough price for many global fields, and companies are still struggling to rationalize exploration activities on all but very best prospective resources in their portfolios.
According to a report from Wood Mackenzie, the comparison between pre- and post-COVID-19 exploration will be stark. The company predicts that exploration “will bear some of the deepest cuts in percentage terms” as even “optimistic” explorers require a US$40 per barrel price.
Oil prices, while inching upwards from negative pricing, are still far below the level companies need for to justify expenditure. Reuters reports that most US shale producers had budgeted for a barrel price of between US$55 and US$65. This ensured that some companies would not survive the onslaught on energy that COVID-19 brought with it. Companies’ CAPEX budgets have been slashed by up to 25 percent and exploration put on the back foot.
The OPEC+ countries, including Mexico, sought to counterbalance the impact of the global pandemic on prices by cutting production by 9.7MMb/. General Secretary Mohammad Barkindo said that the cuts have worked well, Reuters reports. “The oil markets have responded positively to the historic agreement, as well as its robust implementation by participating countries. All in all there is a gradual but steady convergence of the fundamentals of supply and demand,” said Barkindo. However, Reuters adds that OPEC is aware that the industry is not out of the woods quite yet, with another unnamed delegate saying that the group would wait “maybe until July or August” for it to be sure the large-scale production cut had achieved its aim of balancing prices. The group has not ruled out more action.
The IEA’s Executive Director Fatih Birol recently said that oil demand will go “back to where it once was and beyond” as a result of the current low prices. This should lead to an increase once again and more impetus for further exploration.
AMEXHI’s Merlin Cochran recently told Mexico Oil and Gas Review that though it was too early to yet know the impact that the global pandemic will have on Mexico’s upstream future. “It is hard to assess the effect of the crisis while we are still in the middle of it and there are many questions that remain unanswered,” he said.
Yet Cochran is certain of the benefit companies already engaged in exploration and field developments works in Mexico will bring to the country. “As companies progress through their contracts, new commitments will come. But so far, approved investment is close to US$39 billion, stretching from the Energy Reform into the foreseeable future. Companies have already invested US$11 billion according to figures published early this year by CNH. In 2020, companies are set to invest more than they have in all previous years put together,” said the director.
PEMEX’s exploration future is less certain. The company, which is seeking to increase its proven reserves alongside an increase in production of 2.6MMb/d by 2024, has reported a string of discoveries during 1Q20. The five new fields located in Tabasco and Veracruz state should give another 195MMboe to the company.
However, at the end of April, PEMEX E&P had its budget cut by around 15 percent, some MX$40.5 billion (around US$1.8 billion) from the planned MX$269.86 billion budget, reported El Universal. Despite the budget cut, this is the highest budget the company has allocated for E&P since 2015.
Privates in Mexico have also reported recent good news with Repsol announcing two deepwater discoveries earlier this month with the drilling of the Polok-1 and Chinwol-1 wells, while in February, Eni announced its Saasken discovery that may hold up to 300MMb/d. But COVID-19 has also provided hardship. Murphy Oil announced it will defer the two-to-three exploration well campaign that was scheduled to begin in 2020. Those companies reliant on operators are also experiencing difficulties. Halliburton has temporarily closed its three offices in Mexico after reducing staff in its Houston HQ by almost one thousand.
The long-term development of and investment into exploration is uncertain. As Wood Mackenzie’s report comments, the impact of COVID-19 on exploration’s future “will depend on the duration of the pandemic, the depth and duration of the inevitable global recession that follows”.