A Dreary Investment Outlook for Oil and Gas in Gulf of Mexico?
Exploration and production companies in the Gulf of Mexico have now joined the budget-cutting parade, slashing capex in order to stay afloat in this new oil market reality. Players such as Talos Energy, Murphy and Kosmos have put new sanctioning on pause, with the exception of approved projects, and additional cuts are being evaluated. Indeed, signs have already emerged indicating that the dual supply and demand shock will have a deeper impact on E&P sanctioning in the region than seen during the previous oil price crash in 2016. Reduced exploration activity and postponed new development sanctioning will be key to improving the current cash flow situation.
Investments furthest removed from revenue generation will be the first to go as part of E&P cost-cutting efforts. In that sense, exploration activity will take a hit in 2020 as operators postpone the spud timing of exploration wells in order to push exploration expenditure further into the future. Over the last five-year period, infrastructure lead exploration (ILX) has been a favored exploration strategy in the Gulf of Mexico due to higher success rates, lower required development investment and quicker payback time. However, the current situation is of such magnitude that we believe even ILX will take a hit.
Looking Ahead at Exploration in the Gulf of Mexico
In the mid-term, cost-cutting measures will affect the development side of the investment cycle as well. The rapid oil price decline has left investment decisions more or less on hold. E&P companies are closely monitoring the situation, awaiting greater clarity in the oil price outlook before committing cash to currently unsanctioned projects. One example of this is the North Platte development, where platform construction bids have been put on hold by Total. However, as time marches onwards and E&Ps become accustomed to a lower oil price outlook, we expect some sanctioning will occur in the latter part of 2020; subsea tieback developments can have breakeven prices that offer positive net present value in a $30 oil price environment.
Capital and exploration expenditures will get a trim, but we see that the efforts will be made on discretional expenditures, which can be deferred. Sanctioned projects are expected to proceed, although some delays might occur in order to temporarily reduce expenditures. Current investments directed at the Gulf of Mexico are primarily related to existing projects under execution, and we see that the ongoing lack of investment decisions – in addition to a lower oil price outlook – could cause a dreary investment outlook in the coming years.