Page 8 - Euroil Week 16 2020

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UK production shut-ins not likely, but picture not pretty: Rystad
UK
The main concern is FIDs.
UK oil production is unlikely to experience major shut-ins even if oil prices slide to $20 per barrel, but it is still not “a pretty picture” for the sector, Oslo-based Rystad Energy said in a research note on April 17.
Around 30,000 barrels of oil equivalent per day (boepd) of UK output does not cover short-run marginal costs at $20 per barrel oil, putting these assets at risk of early closure, Rys- tad estimates. But most operators will instead try to keep running these facilities at a tempo- rary loss, to extract profits when the market recovers.
The greater concern is final investment deci- sions (FIDs), as Rystad estimates that only 34% of the UK’s unsanctioned resources are commer- cially viable at $30 per barrel and none at $20 per barrel. The rate of FIDs was already slow- ing before the COVID-19 crisis, with only six sanction decisions being taken last year, versus a dozen in 2018.
“We expect sanctioning activity to be low in the current price environment, not only because of the breakeven price of the projects but also because operators will tend to be cautious over the scale and pace of future capital spending commitments,” Rystad expert Sonya Boodoo commented.
The price rout will take a heavy toll on explo- ration, but it will mostly affect the well count in 2021 rather than this year, as rigs have already been contracted for most of this year’s wells. The twothatdidnotcontractrigsyet–theCairn-op- erated Jaws and the Ithaca-operated Folta – have both been deferred.
Cash flow will also take a significant hit. Based on Rystad’s projection that oil will average
$34 per barrel in 2020, UK upstream activity will be cash-negative in 2020, with free cash flow at minus $1.3bn. At $20 per barrel oil, this loss wid- ens to around $3.4bn.
The UK merger and acquisition (M&A) mar- ket will struggle with access to financing, amid price uncertainty and growing decarbonisation sentiment. Private equity investors were instru- mental in bolstering investment levels after the last oil price collapse in 2014, but Rystad doubts that they will come to the rescue this time around. Operators have also deferred divestment plans.
As for the UK government, Rystad expects its petroleum revenues this year to be around zero or possibly even negative, because of tax refunds. This is because tax payments are strongly con- nected to cash flow.
Under coronavirus (COVID-19) support measures, medium-sized UK firms have access to government-backed loans. Those with an annual turnover of between $55 and $610mn can apply for loans of up to $30mn from banks with an 80% government guarantee. This will help companies maintain operations and keep their debts in check.
“UK players already stretched their limits and accumulated losses in the previous market downturn, so they now have very limited oppor- tunity to absorb further reductions,” Boodoo said. “A favourable tax regime and competitive operational costs for producing assets will sus- tainshort-termproduction.”
In the medium term, the UK will struggle to maintain production because of cash and weak prospects for acquisition-driven funding of pro- jects, the analyst warns. ™
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Week 16 23•April•2020