Oil & Gas Middle East – November 2018

(Jacob Rumans) #1

10


INDUSTRY OUTLOOK

NOVEMBER 2018 oilandgasmiddleeast.com

T


he crash in oil prices
from $115 per barrel to
under $35 at its lowest
point was one of the
most significant macroeconomic
developments in recent years.
Although oil prices have started
improving, climbing over $80 in
October, the downturn tested
and proved the resilience of
international oil majors.
One primary concern has been
whether oil majors have been
underinvesting following huge
capex cuts made in 2014. We
have not seen this be the case.
Despite cutting investments
by nearly 50% and postponing
investment decisions on major
developments, activity levels
did not drop as much as dollar
capex. Instead, we have wit-
nessed an increase in actual and
projected aggregate production.

Production through downturn
Between 2013 and 2017, oil
production profiles had mod-
est changes, with the liquid and

gas production mix remaining
relatively stable across the su-
permajors. We expect aggregate
production to continue to grow.
We generally consider liquid
production to be more profit-
able than gas production. Across
all majors, about 55% of the
production profile consisted of
liquids, on average.

Low prices hit proved reserves
A key measure for oil companies
is their reserve life index (RLI),
or the years it would take to use
up their reserves, assuming a
constant production rate and no
portfolio changes. Since 2013,
the average RLI on a one-year
production basis reduced by one
year to 13 years, which is suffi-
cient on a proved reserve basis.
In 2016, when lower prices
affected ExxonMobil’s project
in Canada, it removed 3.5bn bar-
rels of bitumen from its proved
reserves. Meanwhile, Shell’s
proved reserves declined in
2015, but its acquisition of BG

helped increase proved reserves
to above 13bn barrels of oil
equivalent (BOE) in 2016.

Cost cutting softened the blow
As oil prices fell, all major ener-
gy companies saw combined oil
and gas revenue per BOE fall by
more than half. Cost cutting ini-
tiatives helped soften the impact
of this plunge. Gas sales acted as
a hedge, but their mitigating ef-
fect was reduced because some
gas and LNG contracts were

‘Big Oil’ production


stays big despite


capex slash


Simon Redmond, senior director, commodities at S&P
Global Ratings, believes capex cuts by oil majors since the
downturn has had minimum impact on production.

Simon Redmond
is the senior
director of com-
modities at S&P
Global Ratings

“DESPITE CUTTING INVESTMENTS BY
NEARLY 50% AND POSTPONING FINAL
INVESTMENT DECISIONS ON MAJOR DE-
VELOPMENTS, ACTIVITY LEVELS DID NOT
DROP AS MUCH AS DOLLAR CAPEX.”
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