Offshore staff
LONDON – Capital spending across Africa’s upstream sector could fall by around one-third this year, according to Wood Mackenzie, with producers targeting similar opex cuts in order to remain cash-flow neutral.
Gail Anderson of Wood Mackenzie’s Africa upstream team said: “The coronavirus pandemic presents a growing problem. Africa’s upstream sector is reliant on lengthy and complex supply chains across many countries, providing transmission pathways for the virus.
“Production remains intact for now, but as more restrictions are added on the movement of people and equipment, the harder it will become for producers to maintain production. Day-to-day business continuity is becoming increasingly difficult, and the fear is that some projects may eventually grind to a halt.
“At this point though, spending cuts rather than coronavirus will be the main driver of any production declines this year, with the real impact being felt in 2021.”
In response to a price slump, operators typically cut discretionary expenditure at producing fields to protect cash flows either at an asset or company level, or both.
Anderson said: “The majors, on which Africa depends, have announced sweeping cuts to capital expenditure of 20%-30%. Based on these disclosures and our assessment of key projects, we expect capex cuts in the region of 33% for upstream Africa.”
Where possible drilling will be deferred, she added, with producers focused on the highest-ranked opportunities in their portfolios. Operators will again seek to renegotiate contracts downwards – although there is less wriggle-room than before – and defer any advanced contracts that have not yet been signed off.”
In any case, the virus may speed up this process due to the physical restrictions on mobilizing personnel and equipment. Those with rig contracts could declare force majeure, freeing them from penalties.
Anderson said: “During the last slump, capex in Africa fell by around 20%. This time we think a third of capex, or around $10 billion, will be shed across the continent this year.
“Opex will come under the spotlight too, with some operators looking for reductions of as much as 40%. Given the last round of efficiency measures, we think it is doubtful that the same level of cuts can be achieved, particularly at mature offshore fields that require ongoing maintenance and integrity work and lack remote control systems from shore.”
Most fields in Africa are economic at $40/bbl in 2020, although there is clearly uncertainty over where prices eventually will settle.
Following the last price crash of 2014, African production was flat in 2015, with the decline becoming evident in 2016. This time, Wood Mackenzie anticipates more immediate and deeper cuts.
“But if we see more coronavirus force majeure events or if the virus were to spread into field operations and limit the ability of producers to market their crude, there would be further downside risk in 2020,” Anderson concluded.
03/31/2020
