The global upstream oil and gas industry has seen some $US1.6 trillion ($2.33 trillion) erased from its valuation thanks to the oil price crash.

Wood Mackenzie says this captures the impact of its downgraded long-term Brent price assumption, which was reduced from $US60 per barrel to $US50 per barrel, and other factors.

It noted that since the crash, global upstream – encompassing the exploration and production of oil and gas – development spend for 2020 was 30 per cent lower than its pre-crash view.

The global resources consultancy added that North America, Africa and Asia were the hardest hit regions and warned that these regions may never recover to pre-crash levels.

Additionally, only nine major final investment decisions (FID) are expected in 2020, well down from Woodmac’s pre-crash view of about 50 new project approvals.

Of all the different sectors, the valuations for oil sands and heavy oil have been hit hardest in percentage terms, down more than 50 per cent.

However, conventional onshore and offshore projects did not escape unscathed with $US1 trillion wiped off their collective valuations.

Investment decisions are likely to be a lot tougher as well, with Woodmac estimating that more than 40 per cent of future projects would now generate an internal rate of return – a key measure of profitability – of less than 15 per cent.

Tight oil and heavy oil cash flows have also suffered the most, though the overall resilience of the industry has improved since the last downturn.

“The oil price crash and the market uncertainty it caused has affected all regions, all operators and all resource themes,” Woodmac upstream vice president Fraser McKay said.

“To date, cuts to expenditure have largely been in line with our expectations. New project spend has stagnated and output has been curtailed, most notably among OPEC+ participants and in the US tight oil sector.”

While oil prices have rebounded strongly since the West Texas Intermediate (WTI) crude benchmark plummeted into negative territory in April, concerns have been raised about how far prices can climb.

BP has slashed its long-term outlook by 27 per cent to $US55 per barrel while Australian petroleum imports are currently at their lowest levels since February 2005.


Local impact

Australia’s oil and gas sector has certainly felt the impact of the oil price crash with several majors putting big projects on ice.

Liquefied natural gas exporter Woodside Petroleum (ASX:WPL) has postponed FIDs for its Scarborough, Pluto Train 2 and Browse projects.

It said in late March that the “current uncertain global investment environment arising from the spread of COVID-19, combined with oversupply of crude oil and LNG, has led to significant decline in prices, requiring decisive and swift action”.

Likewise, Santos (ASX:STO) announced a 38 per cent, or $500m, reduction in its 2020 capital expenditure with the company deferring a decision on the Barossa gas field in March.

Since then, it has signed a letter of intent to sell a 12.5 per cent stake in Barossa to JERA.

It has also proceeded with the acquisition of ConocoPhillips’ northern Australia and Timor-Leste assets for a reduced purchase price of $US1.265bn plus an increased contingent payment of $US200m.

Origin Energy (ASX:ORG) also told the market in April that it was reducing upstream capital expenditure for the APLNG project by between $300m and $400m while pausing exploration in the Beetaloo Basin.


However, the delays might represent an opportunity for smaller, more nimble companies.

Over in Western Australia, gas explorers such as West Erregulla partners Strike Energy (ASX:STX) and Warrego Energy (ASX:WGO) are driving appraisal of their significant gas find.

Warrego managing director Dennis Donald told Stockhead in May that the decline in the North West Shelf and delays in developing the Browse and Scarborough fields presented an opportunity for the company and other Perth Basin operators.

3D Oil (ASX:TDO) is also well positioned to capitalise on the projected decline in gas supplies on the east coast after it completed the farmout of its T/49P permit offshore Gippsland Basin to ConocoPhillips.

The US supermajor is acquiring at least 1,580sqkm of 3D seismic at no cost to 3D oil and may elect to drill an exploration well for which it will carry up to the first $US30m of costs.

Meanwhile, Cooper Energy (ASX:COE) is commissioning the Orbost gas processing plant, which will process gas from its Sole gas field.

Gas from Sole is being sold at spot prices less transportation into the eastern Australian markets.