African Upstream to See 33% Drop in 2020 Capex: WoodMac

Africa's upstream sector is expected to cut capital spending by a third in 2020, with operators targeting similar reductions in operating expenditure in a bid to protect cash flow, Wood Mackenzie said in a research note on March 31.

"Unlike the 2015-2016 price crash, this time nothing is sacrosanct: some operators will even wield the axe on committed spend, as well as the discretionary expenditure," the Edinburgh-based consultancy warned.

The coronavirus (Covid-19) pandemic and the resulting restrictions on movement of people and equipment will make it harder for producers to maintain production, but the more immediate threat to output this year will be the spending cuts, it said. The real impact will be felt in 2021.

"We expect less cost stickiness, meaning the cuts will be quick and deep. During the last slump, capex in Africa fell by around 20%. This time we think a third of capex, or around $10bn, will be shed across the continent this year," WoodMac analyst Gail Anderson explained. "Opex will come under the spotlight too, with some operators looking for reductions of as much as 40%. Given the last round of efficiency measures, we think it is doubtful that the same level of cuts can be achieved, particularly at mature offshore fields that require ongoing maintenance and integrity work and lack remote control systems from shore."

Operators will target cuts to short-run marginal costs, or the price required for existing production to stay profitable. Most African fields will break even at $40/barrel in 2020, but there is uncertainty about where oil prices will settle after markets stabilise.

Africa produced 13mn barrels of oil equivalent/d in 2020. Output in the continent was stable in 2015 after the previous oil price crash, but declined in 2016.

"This time, we expect more immediate and deeper cuts to hit the top line faster," Anderson said. A reduction of 5%, excluding Libya, is possible, she said. There will be an additional downside risk in 2020 if more Covid-19-related forces majeures emerge or if the virus affects field operations and the ability of producers to market their crude.

On a global level, Norwegian consultancy Rystad Energy said on March 30 it predicted a drop in upstream capex of up to $100bn, marking a 17% year-on-year decline from $546bn in 2019. This indicates that capex will sink to its lowest level in 13 years, Rystad warned.