PERTH (miningweekly.com) – The upstream oil and gas sector was facing unprecedented uncertainty with the massive fall in the oil price and the uncertain market environment brought on by Covid-19, industry analyst Wood Mackenzie (Woodmac) has reported.

In a research note, Woodmac noted that the upstream oil and gas sector’s initial response would be to cut discretionary investment, with the analyst predicting that global spend could fall by well over 25% year-on-year.

“To improve their chances of survival at low prices, companies have three main levers to cut expenditure; drive efficiencies to extract the same or similar production for lower investment, defer the sanction of new projects, and reduce activity levels and costs in the base business,” the research note reads.

“Large new projects will be put on hold and short-cycle discretionary investment will be dialled back to the bare minimum. Spend on projects under development and onstream will also be targeted. Exploration will be trimmed; operating and other fixed costs face intense scrutiny.

“Only the lowest-cost producers with the strongest finances will be in a position to make meaningful discretionary investments. Any decision to follow Saudi and Russia and grow output will likely be driven by policy rather than economics.”

Woodmac noted that the industry’s ability to keep higher cost barrels flowing would be severely tested, and longer-term, the impact of a lack of spend on maintaining existing production and capital spend to replace declines would take over as the primary driver of supply.

“In the short term, companies, governments and other stakeholders are likely to continue producing assets at a loss, as they have in the past, in the hope the price will rebound quickly. But, the current trifecta of oversupply, demand evaporation and global behemoths fighting for market share may require immediate and dramatic action.

“Just as companies rush to stem the cash haemorrhage, petro-economies may have to act to avoid steep climbs in budget deficits. Paradoxically, where a high proportion of an asset’s production costs are fixed – think facilities running costs, materials, rent, compliance and so on – the easiest way to reduce unit operating costs is to increase production, if that is an option.

“If prices don’t rebound, the taps will inevitably be turned off. Shut-ins will be more substantial than 2015/2016. Given the difficulties and costs associated with restarting mature production, a proportion of this supply may never return.”