Historic drop in oil investment

  •   09/06/2020 - 11h05
  •   HARMANT Adeline

Because of the coronavirus pandemic that has been affecting the world for several months now, the oil market is facing a major crisis. Brent crude oil is indeed evolving at a historically low level that it had not reached for about twenty years. We also expect hydrocarbon revenues to fall by more than 40% in 2020 compared to the previous year. These conditions, coupled with a drastic drop in demand and a projected decline in spending by large companies, investment in energy is expected to fall by 25% in the first quarter of 2020 alone to $410 billion. The Total group alone is thus forecasting a reduction in its investments of around 25% this year.

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Historic drop in oil investment
Image copyright: ben klocek - Flickr

Declining investment and major consequences in the sector :

The majors will thus be the first to cut back on their exploration spending, i.e., on projects leading to the discovery of new deposits. These expenses should indeed decrease again in 2020 because of the drop in dedicated funding and practical difficulties in moving personnel and equipment to the areas concerned, as the IEA or International Energy Agency pointed out in a press release in May.

This decline in investment will of course have important consequences in the sector. Thus and in the short term, the States whose economy depends largely on revenues related to hyrdocarbons should suffer from this situation since their budgets which are built on the revenues related to new drilling and the high price of the barrel have been urgently reassessed. We can cite the example of Gabon which is a small producer in Africa and which has to say goodbye to the revenues from the drilling recently put into production off its coast.

 

More storage capacity:

Another phenomenon that will be introduced by this decline in investment in the sector concerns the ability of producers to supply the market to meet the still high energy demands. On this subject, the International Energy Agency states: "If investment remains at 2020 levels for the next five years, this would reduce the supply level initially forecast for 2025 by almost 9 million barrels per day".

An imbalance between supply and demand is therefore expected, with production failing to meet the needs of the market. In addition and in the meantime, the closure of some oil wells, which was decided by some operators during the health crisis and due to a drop or saturation of storage capacities, should also weigh in the balance. Not only will this lead to a drop in productivity, but restarting these wells will require a significant investment. It is also noted that a permanent closure of these old fields with low productivity and high operating costs is more than likely.