The current financial crisis has put immense pressure on the cash flow of companies by lowering commodity prices and making external finance difficult and expensive to access. The diminishing expected rate of return on projects due to volatility in crude oil price, coupled with a lack of funding support for projects as a result of tightening credit markets, are the major reasons for the decline in capital expenditure in the last quarter of 2008 and expenditure plans for 2009.
In turn, reduction in expenditure has led to lower exploration and production activities. Under such circumstances, most oil and gas companies will prepare their capital budgets more realistically in line with their internal cash flows.
Since mid-2008, instability in financial markets and the subsequent global economic slowdown, along with a sharp decline in oil prices, led to an uncertainty in the global oil and gas industry. Demand for oil decreased by 2.5% in the last quarter of 2008 and by an additional 3.6% in the first quarter of 2009.
Weak oil demand followed by plunging oil prices has made investments in oil and gas projects less profitable and attractive. Moreover, the cost of construction and equipment has not gone down to the levels that oil prices have. This has led to a tightening of cash flow for all oil and gas companies.
Expansion plans have also been held back in supply capacities, the adverse affect of this being seen with capital expenditure in oil and gas projects. This, in turn, has led to extended periods of excess capacity or supply shortages, which has fuelled further volatility. Furthermore, banks and other financial institutions have increased interest rates and tightened lending policies to check diminishing liquidity and maintain a strong balance sheet.
As a result, most companies operating across the oil and gas value chain are reviewing their capital expenditure plans and have rescheduled proposed projects, while a significant number of ongoing projects have been deliberately slowed down or suspended. The investment pattern has been seen to vary, however, depending on the company, degree of capital intensity required in projects and the nation each company is operating in.
The current global economic slowdown has affected integrated and independent oil and gas companies more than national oil companies (NOCs), many of which are planning to maintain capital expenditure for 2009 in line with that of 2008 or to increase them above that level. Backed by robust balance sheets and government funding, they can afford this luxury in the present tough time, however, volatility in oil and gas prices and vague estimates of future demand make it difficult for the NOCs to estimate planned investments to secure future supplies.
Figures collected by this site’s sister analyst firm GlobalData show investments of major NOCs have been affected to a limited extent by the financial crisis. Although Russian companies such as Rosneft and Gazprom have significantly reduced their CAPEX plans, while Brazilian oil producer Petrobras has also slightly reduced its capital spending for 2009, NOCs are better placed than independent and integrated oil and gas companies. With limited exposure to the equity markets or to international financing, the impact of the global financial crisis on NOCs has been limited. For integrated and independent oil and gas companies, however, limited capital availability and tighter credit terms have led to significant cut backs in their future spending plans.
Almost all major integrated and independent oil and gas companies have revised their capital expenditure plans for 2009 to show the negative affect of the credit crisis. Despite strong cash flow and revenue structures, large integrated companies such as BP plc, Chevron Corporation and ConocoPhilips have reduced their capital investments in 2009 from the previous year due to uncertainty within the oil and gas environment.
Occidental and Canadian Natural Resources reduced their capital spending considerably in 2009 to almost half of their capital expenditure in 2008. Meanwhile, smaller independent companies such as Suncor Energy , Talisman Energy and Apache have significantly cut back capital investment plans.
Across the global oil and gas industry value chain, the upstream sector has been the most affected in terms of reduced investment in exploration and development projects in 2009. Countries such as Canada, US, UK and Russia, which have higher development costs, have witnessed a sharper decline in upstream investment expenditure than countries in the Middle East and Africa.
Upstream companies operating in Canada, the US and the UK have reduced drilling and other development activities by more than 40% in 2009 compared with the previous year. In the UK, the Lochnagar project, which is operated by Chevron Corporation, has been postponed by almost two years and is now not planned to commence operations until 2012. Similarly, in the Gulf of Mexico, the BP Puma project has been postponed by three years and the Perdido platform project has been rescheduled from 2009 to 2010.
Midstream, investments in LNG terminals have also been hit hard. Iran, which has the second largest gas reserves in the world, has several delayed liquefaction projects. LNG projects such as the Persian LNG, Pars LNG, Iran LNG and Qeshm LNG, with a total planned capacity of 37.2 million tons, were due to come onstream by 2010.
However, there are unlikely to commence operations before 2015 now. Similarly, Qatar’s new projects, including Qatar Gas 2 (Train 4 and 5), Qatar Gas 3, Qatar Gas 4 and Ras Laffan LNG III, have stalled. Gas supplies from the North Field in Iran are still to be reviewed.
Downstream, investments in the refining sector have been affected only a little less. Planned refining projects have been rescheduled due to the financial crisis and a weak global outlook for oil product demand is being felt. Major projects such as the Yanbu Refinery in Saudi Arabia, Nansha Refinery in China and Al-Zour refinery in Kuwait have been delayed or suspended, and various other refinery projects in the Middle East, the US and the UK have also been delayed.
Regions with mature fields and countries and with uncertain fiscal and political stands have witnessed a rapid downturn in investments. Countries such as Venezuela, Nigeria, Iran and Iraq, which are known for their large resources and unstable fiscal and operating regimes, are witnessing a pullback of foreign as well as regional investment. For example, the commencement of Forcados Yokri of Shell Petroleum Development Company of Nigeria has been postponed from 2011 to 2012. Similarly, Iran’s upstream projects Kharg NGL, Darkhovin III, Azadegan South II have been postponed by two years from 2012 to 2014.
Highly capital intensive projects with long lead times have made companies revise investment plans. Large upstream oil and gas projects and LNG projects have fallen victims to the economic slowdown, especially those companies extracting oil and gas from unconventional sources. Companies involved in the Canadian oil sands, which require high development costs, have been severely hit by low crude oil prices.
Commencement of the Athabasca Oil Sands Mining Project Expansion, Phase 2 (Canada), which has a peak capacity of 100,000 barrels per day of Royal Dutch Shell, has been postponed from 2010 to 2011. Similarly, the Kearl Oil Sands project of Exxon Mobil in Canada, which has a peak capacity of 100,000 barrels a day, has been postponed from 2012 to 2014. At the same time, several planned upstream projects in Canada have been suspended for some time, including BA Phase 1-3, Firebag Stage 5-6, Fort Hills Mine projects, Sunrise project and the Kai Kos Dehseh Upgrader.
The global economic slowdown had dampening effects on crude oil and gas demand, which led to a sharp decline in oil prices overall, and resulted in a dip in the capital expenditure of oil and gas companies globally.