Arising from the covid-19 pandemic and the consequential oil price plunge, the national oil companies (NOCs) globally are estimated to cut exploration budgets by over a quarter on average in 2020.
The analysis according to Wood Mackenzie was based on announcements and tracking well plans of 11 top spending NOC explorers, including three Chinese NOCs, PTTEP, PETRONAS, ONGC, Qatar Petroleum, Rosneft, Gazprom, Petrobras and Pemex whose combined original budgets were potentially reduced by about 26% or US$5 billion to around US$14 billion this year.
Huong Tra Ho, Woods senior analyst said: “While the range of exploration budget cuts for the NOCs is slightly more diversified than that of the Majors, conventional exploration remains important for them.
“Most NOCs consistently spent between 12% and 35% of their upstream budgets on exploration, an average of about 17% over the 2015-2019 period. This is significantly higher than the majors’ average spend of 8% of upstream budgets on exploration.”
Stating that NOCs with substantial international presence will prioritize domestic activity, with deeper cuts to overseas budget.
Ho said: “Most NOCs on the list carry strong government mandates. Many NOCs prioritize current revenue and contribution to government budgets at the expense of capital investments for the future. A dollar invested at home remains at home in the form of local employment, local services, taxes and government take.”
NOCs with constrained domestic resources according to Huong Tra Ho could place more strategic importance on exploration compared to those with resource abundance. For organically added resources he said contribute between 50% and 70% of their production in the next decade; PETRONAS and CNOOC Ltd he said are striving to protect their exploration plans as much as possible. And Gazprom and Rosneft in contrast have long reserve lives and feel less pressure to rush their exploration plans.
Another key factor to supporting exploration plans he noted was financial strength, a factor representing strong balance sheets for Petronas, PTTEP and CNOOC Ltd as they continue with most of their high-impact exploration ambitions.
Ho said: “Some NOCs can achieve meaningful absolute savings from exploration cuts, especially if it originally makes up a big portion of the company’s upstream budget. An example is Sinopec, whose exploration spend consistently accounts for a quarter or more of upstream budget; in which case cutting back exploration significantly contributes to necessary savings.
“Exploration budget cuts while necessary today, will impact companies’ future growth and sustainability. Given how important exploration is for the NOCs and their growing share of global new discoveries, these budget cuts are likely short-term measures rather than long-term. We expect NOCs to revitalize their exploration programmes as the sector recovers.”