“The Big Cut”: 36 Percent Spending Cut for North American E&P Companies in 2020

'The Big Cut': 36 Percent Spending Cut for North American E&P Companies in 2020

Cutbacks amount to a $24.4 billion annual reduction compared to 2019

April 08, 2020

The collapse in world oil demand and low prices are driving large spending cuts among oil companies around the world. The largest cuts in percentage terms so far are coming from North American E&P companies-oil and gas producing companies focused on the U.S. and Canada. According to IHS Herold calculations, North American E&P companies plan to reduce spending in 2020 by 36% relative to 2019 levels. [1]

This translates to a $24.4 billion cut in 2020 compared to last year. International oil companies are also cutting spending significantly, by 20% to 30%, with a substantial part for some coming from their operations in the United States.

The cuts in spending will figure in discussions later this week at the OPEC+ meeting and the potential new grouping of 'OPEC+ plus G20.' Unlike other countries, the U.S. government cannot mandate cutbacks. But market economics and logistical constraints are mandating the cutbacks reflected in the 'Big Cut' in company spending.

'The Big Cut is here. The U.S. government can't order cutbacks like other countries. But economics and the market are mandating dramatic budget cuts that will bring down U.S. production this year.' - Daniel Yergin, vice chairman, IHS Markit

• Much lower spending points to significant declines in U.S. crude oil production. We currently estimate U.S. crude oil production will fall 2.9 MMb/d by the end of 2020 compared to first quarter 2020.[2] Canada, whose main producing province of Alberta already has constrained production via its curtailment policy, will also be impacted. Total investment in the Canadian oil sands will be the lowest in 15 years.
• Nearly all companies are reducing spending-including some by more than 50%. Of the 44 North America E&Ps; that have made public spending announcements, 41 are cutting relative to 2019 levels. This year would mark the second consecutive year of lower spending. In 2018 North American E&P spending was $87 billion.
• All other company categories are also cutting spending, but not as much as North American E&Ps;. International oil companies and national oil companies are cutting spending by 24% in 2020.

'Oil spending is falling around the world but the most dramatic cuts are in North America' - Dan Pratt, Executive Director, IHS Herold

[1] See the 30 March 2020 Oil Market Briefing, Nowhere to go: 10 MMb/d of oil production cuts coming

[2] See the 6 April 2020 IHS Herold report, Company Peer Group Analysis: Reduction in spending update.

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