To protect balance sheets, maintain shareholder pay-outs and preserve cash, oil and gas companies have gone into survival mode, reducing forecast expenditure where possible to weather the impact of Covid-19 and oil market volatility. As a result, capital expenditure (CapEx) cuts of over $85bn from over 100 tracked companies across the industry have been announced so far.

Source: GlobalData Oil and Gas Intelligence Centre. Data as of 17 April.

When consolidated by company type, integrated oil and gas companies have reported the largest volume of CapEx reductions for 2020. Significant capital reductions have been seen in upstream operations, particularly for the US shale drilling but also for global exploration budgets and unsanctioned developments.

For example, Exxon Mobil announced a 30% reduction in CapEx for 2020 with the Permian Basin accounting for the largest share of the cut. Furthermore, major midstream projects such as expanding and new-build liquefied natural gas (LNG) facilities, including Pluto Train 2 and Rovuma LNG, have been deferred until market conditions improve.

Substantial cuts have also been made by independent oil and gas companies, with the most drastic reductions made by the US-based producers such as Occidental Petroleum and ConocoPhillips. The average reduction from early 2020 estimates for independents sat at 36%.

This is now at risk of increasing further as West Texas Intermediate (WTI) Futures contract prices tumble over the fear of lack of storage capacity for the months ahead. Due to bottlenecking of storage and refining capacity, the risk of being unable to offload crude oil has put pressure on WTI prices, meaning deferral of drilling and completion activity and even production shut-ins are required.

For other international independents, cutting 2020 expenditure will come with greater attempts to protect balance sheets and investment grades, which will allow them to better compete for future investment funding once the market stabilises.

With countries depending on national oil companies (NOC) for dividend payments,  midstream players are sacrificing less of their original budgets because the midstream sector offers more protection during oil price volatility, particularly for pipeline operators since cashflow is less dependent on commodity prices and more dependent on supply volumes. In addition, secured contracts and fee-based income helps provide shelter to short-term market fluctuations. However, new-build projects face delay as supply chain disruptions and government restrictions may slow down project progress.

Although not all members of the oil field service group have announced exact CapEx revisions for 2020, the severity is clear. The group holds the highest average reduction percentage, albeit at a far lower volume. In 2020, service costs were already beaten down by the previous downturn in 2014 / 2015 and the latest developments deal another blow to an already struggling segment.

Globally, a decrease in drilling and exploration and development spending will have a knock-on effect on the oil field service providers. As a result, cutting business spending to the bone while remaining competitive and operationally efficient will help weather the current volatility.

Capital expenditure revisions for 2020 by the top 25 companies (mid-point of guidance range taken)

Source: GlobalData Oil and Gas Intelligence Centre. Data as of 17 April.

Across the industry, value chain measures are being taken to survive the bearish near-term outlook for the industry. With over $85bn erased from 2020 forecast spending to date, companies are in a better position to survive the initial impact of market volatility.

However, the uncertainty of the duration of the economic impact stemming from the spread of Covid-19 makes it difficult to gauge whether further cuts will be required. The magnitude of the current cuts is likely to have hard-hitting ripple effects in the medium to longer term. Companies that seek to preserve financial stability in the immediate term risk longer-term implications for production, revenues and strategic targets.