Oil prices have seen a historic drop over the past two weeks, its most significant decline since 1991.
Prices fell under $30 per barrel, approximately a 50% decline from the beginning of the year. Furthermore, the decrease in the demand and the somber forecasts sparked by the impact of the pandemic on the economy prompted a price war between Saudi Arabia and Russia.
The two nations, the second and third largest oil producers behind the United States, failed to reach an agreement regarding the production cuts meant to boost prices.
With oil prices at current levels, vulnerable producer countries may see oil income plunge by up to 85%
This will put their public finances, which rely heavily on oil income, under even greater pressure, affecting vital services like health & education → https://t.co/QrbRIEyoaJ pic.twitter.com/odFdN3Mule
— IEA (@IEA) March 19, 2020
Adjustments for companies
In this difficult scenario, utilities are trying to adapt to decreasing oil prices caused by the effect on both the supply and the demand.
Several companies have drastically altered their 2020 financial plans and cut their budgets and expenditures.
However, oil companies are not the only ones rushing to make changes in the face of the decreasing prices. Several services companies (drilling, supplies, technology) have also plunged along with crude prices. These businesses are concerned that their clients’ expenditure cuts will force them to make drastic changes, including dividend cuts.
As it usually happens in these types of situations, the collapse of prices has its winners and losers.
Cuts at the Permian Basin
Historically, the United States has been the big winner in the crude price drop. But much has changed since the 1980’s.
In 2019, the U.S. became the world’s top oil producer, exceeding Saudi Arabia, thanks to the shale oil boom. In fact, eliminating this competition was one of Russia’s motives to contribute to the oil price decrease.
For shale oil producers, a sustained price drop could lead some companies to delay their investment plans, which could be an obstacle for job creation and growth.
Some O&G companies have started to cut operations at the Permian Basin – one of the greatest shale oil reservoirs –; as the global oil demand continues to decrease, and so do the prices.
For instance, the Houston-based Apache Corporation announced it will pull all its O&G rigs from the Permian Basin to save on short term spending. The company has decided to reduce its 2020 capital investment by nearly $1 billion.
Similarly, Pioneer Resources, which operates mainly at the Delaware basin and is one of the biggest owners in the region, also announced a significant cut in operations. It will reduce its operated rig count from 22 to 11. It will also reduce its completion crews of six by half.
EIA’s #PermianBasin Report contains a review of the #Wolfcamp, #BoneSpring, and Delaware shale plays of the #DelawareBasin, which is part of the larger Permian Basin. https://t.co/GmbHOVYc6l #tightoil #shaleoil pic.twitter.com/D99vI6DDXO
— EIA (@EIAgov) March 19, 2020
Divesting in Latin America
Another example of this adjustment is Geopark Limited, an independent O&G explorer from Latin America; with operations on Colombia, Peru, Argentina, Brazil, Chile; and Ecuador that has already adjusted its 2020 capital spending program.
Its original budget, between $180 million and $200 million, will be cut by 60% to $70-$80 million.
Low crude prices should also benefit Peru, a net importer that purchased $5.6 billion worth of oil products last year. However, it could also delay the investment in exploration necessary to boost local production.
The picture is slightly less clear for Brazil. Its president, Jair Bolsonaro could find some relief in its treaties with truck drivers, whose strike against the increase of diesel prices two years ago halted the country.
At the same time, Petroleo Brasileiro SA plans to sell assets and reduce its debt will probably be rescheduled.
For Colombia and Argentina, which had announced important investments in fracking, the price drop could also mean a delay of their plans; already affected by complaints from environmental groups regarding the adverse effects this technique could have on the environment.
ICYMI: API President & CEO Mike Sommers joined Bloomberg TV to discuss the impact of the Russia-Saudi oil price war, coronavirus and the state of the U.S. natural gas and oil industry. Watch: https://t.co/oqROQP9L7U pic.twitter.com/pDDmGM6djN
— American Petroleum Institute (@APIenergy) March 18, 2020
Crisis in Venezuela
The situation is particularly dire for Venezuela. Oil sales have already been strongly affected by the collapse of its crude industry, very politicized over the past 20 years. The collapse of international prices will mean even less cash for Petroleos de Venezuela SA.
The case of Europe
Most European nations are big crude importers, mainly importing from Russia, and they benefit from the price drop.
In the case of Norway, the price drop has adverse effects. Oil and gas represent more than a third of its exports and a fifth of the state’s revenue. Luckily, its massive $1.1 trillion sovereign fund gives the government the means to soften the blow.
For more information, check Energía16