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<\/div>\nIn the beginning of the crisis, it was assumed that global upstream spending would fall by around 15% to 20% in 2020 \u2013 around $80 billion to $100 billion below total investments in 2019 \u2013 as operator budgets were already quite lean after the previous market downturn. But, in this new price reality, it appears that operators were forced to cut even deeper.<\/p>\n
In terms of percentages, the drop in investment is comparable to 2014\u20132015. However, this time around, industry spending is falling from a lower mountain to a deeper valley, which will very quickly affect industry performance, even in a short term.<\/p>\n
In 2014-2015, the 27% fall in spending did not significantly impact production performance as companies were able to adapt and streamline. On the contrary, within all supply segments some players even managed to increase y\/y production. Virtually no production was shut-in, even at the facilities with the highest breakeven prices, as the costs associated with shuttering production were too high. Spending cuts were mainly delivered through lower supply chain costs and by cutting out unnecessary expenses.<\/p>\n
However, the industry\u2019s ability to keep high costs per barrel is now being put to the test, with almost all supply segments cutting production in 2020. In the longer-term, reduced brownfield capex will make it more challenging to maintain existing production, while reduced greenfield capital spending will make it difficult to replace declines with new production coming on stream. These two factors could impact the stability of the global liquids supply in the future, changing the industry landscape for good.<\/p>\n
Our research indicates that about 125 E&P\u2019s have thus far communicated spending cuts, amounting to a reduction of $100 billion in 2020. National Oil Companies (NOCs) are the largest contributors to the global reduction, decreasing spending by $32 billion. Most shale operators have revised their capital guidance range as well.<\/p>\n
Although NOCs would not normally be expected to make such drastic cuts, the $25 per barrel of oil equivalent (boe) environment that we have experienced has ushered in a new reality, where even the most reliable companies are tightening their belts and embracing deeper cuts. Importantly, first quarter reports also revealed that almost all majors are seeing production decline as an inevitable part of survival, choosing to optimize cash flows and provide sustainable dividends.<\/p>\n