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Economic malaise threatens to upend US indies

Domestic oil sector in upheaval as producers forced to confront commodity price shock

Saudi Arabian efforts to stifle output growth in the US shale patch are causing what looks very like panic among North American producers. Production guidance across the industry has been hacked and exploration campaigns reduced or abandoned. WTI has fallen to its lowest point in over two decades, even testing the $20/bl barrier.

US E&P companies across the board have drastically downgraded their capex budgets and financial obligations. Independent producers in the Permianincluding the likes of Marathon Oil, Apache and Concho Resourceshave all dialled back plans and braced themselves for an arduous operating year.

Domestic US shale growth is particularly at risk if the oil price continues to plummet. Consultancy Rystad Energy says a $40/bl scenario this year would reduce North American shale investments by 25pc. US bank Jefferies estimates the rig count across the country will fall 20pc in the second quarter and a further 10pc in the third.

Shale suffering

Although most companies operating in the Permian have reduced annual spending, further cuts may still be needed if oil stays below $30/bl for the remainder of this year. US indie Pioneer Natural Resources has slashed spending by 45pc but is still budgeting for an average WTI price of $35/bl. Fellow indie Parsley Energy has reduced spending by more than 40pc, but its budget is still reliant on oil returning to between $30-35/bl. Much of the industry is in a similar position.

Hedging is the immediate stopgap for most companies aiming to offset price volatility in the short term. While some have safeguarded a high proportion of their portfolio this year, others with a lower proportion of hedged production will be reliant on Covid-19 having only a short-term impact and global oil demand returning to normal. Producers also need the Opec+ alliance to return to the negotiating table and resume curtailment.

25pc - potential loss of North American shale investment at $40/bl

But, even if the Trump administration succeeds in persuading a rethink in Riyadh, it will have only a minimal impact in the immediate term. “Whatever the US and Saudi Arabia do right now will not be of much help in the short term,” says Artem Abramov, head of US shale at consultancy Rystad. “We will run out of global storage capacity in May and potential artificial supply adjustments will take time and will likely be quite negligible in the context of demand destruction.”  

US bank Jefferies estimates that US production will still grow by an average of 375,000bl/d this year because of last year’s ramp-up efforts. But it will then decline by 870,000bl/d in 2021 and 370,000bl/d in 2022.

Firms with hedged production might be stabilising their declining finances for now, but if bottomed-out prices become the new norm then the tactic cannot be maintained. Company breakevens across the sector will need to be drastically lowered for many to make pumping work financially.    

Troubled waters

And the Permian is not the only US region being affected. In March, the sixth Gulf of Mexico leasing sale generated the lowest return since the programme began in 2017. A total of 22 companies took part in the auction and it raised $93mn in bids from the sale of 71 blockscompared with an average of $176mn from the previous five sales.

Chevron was the most successful bidder, winning 15 blocks, while UK-based BP won 12 blocks and a further four in joint venture with Houston’s Talos Energy. Before the oil price crisis hit, Talos boosted its Gulf of Mexico portfolio by acquiring producing assets and exploration prospects from deepwater-focused ILX Holdings.

Despite reducing production guidance by 5pc in 2020, Talos say it will still allocate funds for Feed work on the giant Zama project offshore Mexico. But issues around Mexican state-owned Pemex demanding a greater share of the field look set to continue. If sunken oil prices are the new norm it may prove even more tempting for Pemex to try to maximise field stake and revenue share, further complicating progress towards first oil.

Australia’s BHP was the biggest bidder in the Gulf of Mexico auction, with an $11.1mn offer for Green Canyon 80. The company already has 937mn bl oe in recoverable resources from five key projects in the regiona core component of its portfolio.

“Whatever the US and Saudi Arabia do right now will not be of much help in the short term" Abramov, Rystad

At the start of the month, BHP confirmed it had selected pre-Feed contractors for the development of the Trion oilfieldthe first deepwater development offshore Mexico. The company was aiming for a 2020 FID on the project but could now face delays.

And, in the US Gulf of Mexico, BHP has budgeted $2.9bn in project capex to develop the Atlantis and Mad Dog fields. Phase three of Mad Dog represents a 69pc share of the company’s budgeted capex, showcasing the importance of the Gulf of Mexico to the company’s growth. Although BHP has yet to announce capex revisions, any change would likely have a big impact as it is one of the pillars of the company’s growth plan. 

Progress towards first oil on the Whale discovery is also a doubt for operator Shell (60pc) and joint partner Chevron (40pc). Rystad says planned FID this year may be delayed because of the oil price crisis. If the economic malaise continues then many other projects planned to make FID in 2020 will likely be pushed back.

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