Licencing rounds will fall away from priority lists of E& P companies, as the global crisis of demand for crude oil escalates.
“Investors have not faced both a decrease in global oil demand and a significant and potentially prolonged increase in oil supply at the same time before, which has created unparalleled uncertainty”, notes Global Data.
To manage their exposure, many exploration and production (E&P) companies, including major operators, have pledged to reduce capital expenditure (CAPEX) budgets for 2020 by around 20%. This includes sharp reductions to exploration capital, which will significantly limit the amount of exploration budget available for licensing round acquisitions, at least in the short term, GlobalData argues.
The company’s report, ‘Impact of COVID-19 on Global Licensing Round Opportunities’, states that throughout this period of uncertainty, licensing rounds are likely to be extended or deferred as governments prioritise managing the domestic impact of the virus or wait for investment conditions to improve. Several countries including Bangladesh, Brazil, India, Liberia, South Sudan, and Thailand have already announced changes to licensing round activities and it is likely that others will follow.
Toya Latham, Upstream Fiscal Analyst at GlobalData comments: “The number of deepwater licenses awarded as part of bid rounds is also likely to be subdued in the short term. With the largest discoveries of last year located mostly in deepwater settings, deepwater acreage offers potentially lucrative opportunities for E&P companies. However, deepwater projects often require more capital and have longer payback periods compared to onshore and shallow water projects, and therefore deepwater acreage is likely to be less attractive in the current investment climate.”
Following the stabilisation of the oil price, there is likely to be a period of lag before the number of new awards secured through licensing rounds increase.
Latham continues: “Companies with less exposure to the oil price through limited or hedged production, which have available capital in the current environment, are likely to be well positioned for rounds held following the oil price stabilisation and may be in an advantageous situation to capitalize on reduced service costs for exploration activities.”