Insight

NOC Strategies Service

4 April 2020

NOCs respond to the price collapse: Spending cuts, project delays,

and production shut-ins
Andrew Neff, Associate Director
Mansi Anand, Analyst
Roderick Bruce, Associate Director
Franca Davila, Senior Analyst
Rajeev Lala, Principal Analyst
Kareem Yakub, Principal Analyst
Yin Yuan, Senior Analyst

The unprecedented twin blows of the demand collapse caused by the coronavirus disease 2019 (COVID-19)
outbreak and the Russia-Saudi Arabia price war have sent oil prices crashing down, prompting various responses
from national oil companies (NOCs) around the world.
IHS Markit perspectives
Implications • The price collapse is a double whammy for NOCs, hitting their balance sheets directly but
and outlook also reducing their operational autonomy, given the strong economic importance of the oil
sector to most of their host governments, as well as their host governments’ dependence on
NOCs as a source of economic growth, budget revenues, and local employment.
• Despite the lower-demand environment, following the collapse of the OPEC+ agreement,
some NOCs—primarily the Gulf NOCs and Russia’s state-owned companies—are ramping
up oil production, targeting market share and seeking to squeeze out higher-cost oil
producers while their host governments rely on foreign exchange reserves to mitigate the
effects of sustained low oil prices.
• However, most other major NOCs are taking defensive measures in reaction to the price
collapse, including significant near-term capital and spending reductions, announcing project
delays, and—in some cases—shutting in production.
• The price collapse is also exposing the vulnerability of NOCs that rely on foreign partners to
operate their domestic upstream projects, as global integrated oil companies (GIOCs) reduce
their own spending and adjust their investment priorities, leaving the future development of
some projects at the mercy of decisions made outside of their control.

Contacts
Andrew Neff, Associate Director ∙ andrew.neff@ihsmarkit.com, +1 202 481 92 94

Confidential. © 2020 IHS Markit. All rights reserved.

 IHS Markit | NOCs respond to the price collapse: Spending cuts, project delays, and production shut-ins

The near-term reactions of NOCs to the price collapse reflect the urgent need to mitigate the
NOC
effects of a sudden drop in oil prices, reducing operational spending by the NOCs themselves,
performance
which are under pressure from host governments to stem the decline in government budget
impact
revenues flowing from the oil sector. The unprecedented nature of the twin oil price and demand
shocks, together with an ongoing price war that shows few signs of abating, suggests that the oil
market could be in for a sustained period of low oil prices. A “much-lower-for-longer” oil-price
scenario could force NOCs and their host governments to rethink their longer-term strategy,
particularly in a world increasingly geared for an energy transition.
Source: IHS Markit © 2020 IHS Markit

A new world (dis)order

Russia’s refusal to go along with OPEC’s decision to expand production cuts—and Saudi Arabia’s 180-degree
policy reversal to flood the market with cheap oil—triggered a price collapse unlikely any that the oil market has
seen before, exacerbating the challenge for NOCs. While the petroleum industry overall is still in reactive mode,
many of the global integrated oil companies (GIOCs) have already announced steep spending cuts in response to
the price collapse (see the Related publications section below).

However, the speed at which the oil crisis has unfolded has left many NOCs—and the host governments that rely
on their NOCs for economic growth and budget revenues—wrong-footed, reacting to events as they unfold, with
no clear or coherent strategy. A growing number of NOCs have also reduced their proposed 2020 investment
spending, although many others are proceeding as previously planned, with no new guidance on capital spending
or production levels. With the removal of OPEC+ caps on production, other NOCs are taking their foot off the
brakes and ramping up production in the price war.

The myriad responses among NOCs to the oil price collapse reflect the different dynamics behind each company,
where the common denominator is majority state ownership, but each state has different priorities. A heavy
reliance on the oil sector to underpin budget stability and support (if not drive) economic growth is a common
feature of most major petroleum-producing states, but the degree of dependence varies widely across countries
(see table “Economic importance of oil sector to selected countries (2019)”).
Economic importance of oil sector to selected countries (2019)
Country Oil production/GDP (%) Oil exports/total exports (%) Oil revenues/total revenues (%)
Algeria 17% 47% 39%
Angola 41% 87% 50%
Argentina 3% 5% 3%
Brazil 3% 13% 3%
China 1% 1% 3%
Colombia 6% 31% 9%
Ghana 8% 31% 11%
India 4% 9% 5%
Indonesia 2% 4% 7%
Iran 27% 54% 33%
Kazakhstan 21% 59% 30%
Kuwait 46% 82% 86%
Malaysia 4% 12% 15%
Mexico 4% 5% 16%
Nigeria 10% 66% 42%
Qatar 12% 40% 17%
Russia 2% 38% 23%
Saudi Arabia 31% 80% 60%
Thailand 1% 3% 1%
United Arab Emirates 18% 23% 54%
Source: IHS Markit © 2020 IHS Markit

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IHS Markit | NOCs respond to the price collapse: Spending cuts, project delays, and production shut-ins

Likewise, there is a strong correlation between a state’s reliance on oil revenues and its determination to establish
and maintain an NOC—indeed, in most cases, the NOC’s raison d’être is to safeguard the state’s interests in the
development of the host country’s petroleum sector. However, host country dependence on individual NOCs
varies widely across companies, reflecting the degree (or lack) of economic diversification among oil-producing
countries (see table “NOC importance to host country”). In that regard, responses among NOCs to the oil price
collapse reflect both their economic importance to their host country as well as the different approaches to the
crisis by their host governments.

NOC importance to host country*

Company NOC total revenues/host country GDP (%) NOC total revenues/general government revenues (%)
China National Petroleum 3% 11%
Corporation (CNPC)
Ecopetrol 7% 28%
Gazprom 10% 27%
KazMunaiGas 13% 66%
Kuwait Petroleum Corporation 58% 100%
(KPC)
Oil and Natural Gas Corporation 0% 2%
(ONGC)
Pemex 7% 32%
Pertamina 5% 34%
Petrobras 5% 17%
PETRONAS 18% 92%
PTT 15% 69%
Rosneft 8% 23%
Saudi Aramco 46% 150%
Sinopec Group 3% 11%
YPF 4% 11%
Note: *Revenue figures from 2018.
Source: Natural Resource Governance Institute, National Oil Company Database, December 2019 © 2020 IHS Markit

Middle East and North Africa

Following Russia’s refusal to join an expansion of OPEC-led oil production cuts, Saudi Arabia’s decision last
month to reverse course and open the taps accelerated the decline of oil prices, kicking off a fight for market share
among Middle Eastern oil exporters. Regional NOCs are unleashing a wave of fresh oil supplies to the world
market: Saudi Aramco is targeting raising production to 12.3 MMb/d, which includes 300,000 b/d of inventory
drawdowns, while the United Arab Emirates’s Abu Dhabi National Oil Company (ADNOC) has announced that
it will produce 4 MMb/d beginning this month. Kuwait’s NOC, KPC, has ramped up its oil production as well, to
3.1 MMboe/d from 2.65 MMboe/d produced in February 2020, while the start-up of production in the Partitioned
Neutral Zone—which is jointly managed by KPC-subsidiary Kuwait Gulf Oil Company (KGOC) and Chevron
(on behalf of Saudi Aramco)—will add approximately 180,000 b/d in 2020 and is expected to return to its peak
production of 500,000 b/d by 2023.

As some of the lowest-cost oil producers in the world, these three NOCs are confident in their ability to survive
the price downturn. Nevertheless, the tremendous fiscal pressure on their respective national government budgets
will test their ability to sustain ambitious capex in a prolonged downturn. Indeed, in North Africa, Algeria’s

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IHS Markit | NOCs respond to the price collapse: Spending cuts, project delays, and production shut-ins

Sonatrach has already announced that it will cut its 2020 budget by more than 50%, reducing capex and
operating costs by a combined $7 billion (down from $14 billion). The company intends to reduce all spending
that will not affect future production, while postponing project start-ups and reducing employment costs by 30%.
Moreover, the decline in oil prices will have knock-on effects for Sonatrach’s oil-indexed gas supply contracts,
while Algerian gas available for export is squeezed by market oversupply and higher domestic demand. The
emerging gas supply glut also complicates the LNG export strategy for Qatar Petroleum, particularly as the
company engages in partnership negotiations with GIOCs with an eye toward commissioning new North Field
trains. The LNG oversupply situation is less problematic for Iran’s NIOC, given that the company’s LNG plans
for the South Pars field have fallen off the radar since the reimposition of crushing US sanctions on Iran’s oil
sector. After a brief thaw following the signing of a nuclear deal, renewed sanctions have returned Iran’s relations
with the West to a deep freeze, resulting in a steep drop in oil production in 2019; with the devastation of the
COVID-19 outbreak already being acutely felt in Iran, the drop in oil prices will only further aggravate the
country’s woes.

Russia and Central Asia

Sanctions on Russia’s energy sector—and on specific state-run companies, including Rosneft—played a
significant role in Russia’s decision to end cooperation with the Vienna Alliance and instigate the oil price war,
aiming to put the squeeze on the US shale industry. Although long-running US sanctions on Russia’s anticipated
future sources of production growth have undercut Russia’s plans for a series of international upstream
partnerships, Russian oil production has continued to grow. Nevertheless, domestic producers chafed under even
the limited production cuts imposed by the government as part of the country’s OPEC+ commitments, and the
Russian government balked at further production cuts that would cede its market share to US producers.

After the US imposed additional sanctions on Gazprom’s Nord Stream-2 gas pipeline project and then on
Rosneft’s Venezuelan oil-trading subsidiary earlier this year, the Russian government seized on the chance to
retaliate, provoking Saudi Arabia into a price war. Freed of government restrictions on their output, Russia’s
domestic oil firms are stepping up their production, although spare capacity is relatively limited. The structure of
Russia’s oil tax regime means that the government’s revenue intake suffers disproportionately from a steep drop
in prices, but Russia’s fiscal breakeven is well below Saudi Arabia’s, and Russian officials have expressed
confidence in the economy’s ability to withstand a new, sustained low-oil-price environment.

Thus far, Russia’s state-run energy companies have largely shrugged off the oil price decline. Rosneft has only
said that it has adjusted the terms of its open share buyback, but capex cuts may well be coming soon. Likewise,
Gazprom Neft, Gazprom’s oil arm, has remained silent about the impact of the price collapse on its operations,
focusing instead of countering the growing threat from the spread of the COVID-19 virus in Russia. Any move to
slash upstream spending to counter the price decline, however, could exacerbate a projected drop in the
company’s hydrocarbon output in the medium term. Meanwhile, the effects of the oil price shock and Europe’s
COVID-19 outbreak will reverberate downstream in the European gas market, eroding demand for Gazprom’s gas
exports and depressing prices in the company’s oil-indexed gas supply contracts. For Kazakhstan, the oil price
collapse could be even more damaging—not only is the government heavily reliant on oil revenue, but
policymakers have been planning to conduct a partial IPO of KazMunaiGas later this year. For now, Kazakhstan
is still proceeding with the IPO, but low oil prices could undercut the company’s value, prompting the government
to postpone the proposed privatization again rather than settle for less revenue.

Latin America
Expectations of a sharp drop in revenue intake from the oil price collapse have compelled a number of Latin
American NOCs to announce changes to their spending plans. In late March, Brazil’s Petrobras announced that it

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IHS Markit | NOCs respond to the price collapse: Spending cuts, project delays, and production shut-ins

would slash investment this year from $12 billion to $8.5 billion, mainly by postponing exploration, well
interconnections, and construction of production and refining facilities. In response to the severe contraction of
crude oil and petroleum products demand, the company announced that it would cut 2020 production by 200,000
boe/d with reductions from higher-cost shallow-water and deepwater fields within its portfolio. Moreover,
Petrobras’s portfolio management plan that sought to sell $20–30 billion in assets within the next five years to
finance investment and reduce debt is at great risk. However, the M&A market is at a standstill and has already
forced the NOC to postpone the sale of eight refineries. While Colombia’s Ecopetrol has not reduced its
production guidance for the year, its revised 2020 budget (from a range of $4.5–5.5 billion to $3.3–4.3 billion)
likely will impact investments that are in their initial stages. As a result, this could postpone Ecopetrol’s long-
awaited push into unconventional and deepwater production in Colombia.

Political imperatives and the threat of further financial strain on the domestic economy have spurred Argentina’s
YPF to reduce its spending budget, with Mexico’s Pemex likely to do the same. Even before oil prices collapsed,
given Argentina’s risk of financial default and a deepening recession, YPF said it would cut its capital budget by
$750 million from 2019, to $2.8 billion in 2020. The oil price collapse will only further erode YPF’s finances,
adding to the company’s challenge in meeting its debt obligations and likely forcing it to scale back production.
For its part, Pemex has not released a revised budget guidance for its exploration and production segment, which
was previously set for an increase from $10.5 billion in 2019 to $16.7 billion in 2020. Mexico’s NOC set an
objective to increase its average oil production from 1.68 MMb/d in 2019 to 1.87 MMb/d in 2020, but with Pemex
reporting a net loss of $18 billion and net debt in excess of $100 billion in 2019, this target may no longer be
achievable in the context of the price collapse. Given the company’s already strained finances, Pemex is likely to
struggle to make the requisite investments to deliver growth.

The financial situation in Venezuela is even more dire, with the country already in the midst of a deep economic
and political crisis. Oil production from state-owned PDVSA continues to plummet, with the downward trend
recently intensified by the imposition of US sanctions on the company, effectively restricting its export options.
Lower oil demand from China—Venezuela’s largest buyer of crude and its key creditor—is a major concern, and
lower prices will further squeeze the company’s earnings, which already suffer from the steep discounts the NOC
has to offer as a means to secure buyers in Asia. PDVSA has few response options to deal with the challenges of a
new low-oil-price environment, which could hasten the country’s slide to failed state status.

Sub-Saharan Africa
Sub-Saharan Africa’s crude-dependent oil exporters—still grappling with the effects of the 2014 oil price
decline—have been hit hard by the new price war. The region’s two largest producers, Angola and Nigeria, have
already greatly reduced their 2020 budgets, with both countries now facing deep recessions, erosion of limited
fiscal buffers, and unsustainable sovereign debt burdens. In this challenging context, Sonangol and Nigerian
National Petroleum Corporation (NNPC), the NOCs of Angola and Nigeria, respectively, face likely shut-ins of
some producing fields, given the high operating costs of deepwater projects amid vast global market oversupply,
low prices, and limited regional storage.

Neither company has the operational autonomy from their host government or technical skills to carry out
upstream projects on their own, and in the lower price environment both Sonangol and NNPC’s influence in their
domestic upstream sector are likely to be constrained even further. Given the NOCs’ dependence on foreign
operators for key projects, major decisions on recently sanctioned projects and delays to as-yet-unsanctioned new
developments are likely to be made by GIOC partners rather than the two African NOCs themselves. In Angola,
Total announced that spending on recently sanctioned “flexible” brownfield projects will slacken, while IHS
Markit currently expects that only one project will be sanctioned in Angola in 2020–21 out of the five planned in
the same period (pre-crisis). In Nigeria, development of the recently sanctioned expansion at Nigeria LNG will

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IHS Markit | NOCs respond to the price collapse: Spending cuts, project delays, and production shut-ins

likely slow down, while the imminent expected sanctioning of at least four domestic projects will be delayed by
around two years. Revenue pressures from lower oil prices will aggravate existing cash concerns for both
companies, and longer-term plans for partial privatizations of both Sonangol and NNPC could also be upended.

Southeast Asia
The oil price collapse is a more mixed picture in Southeast Asia, as lower prices present both risks and
opportunities for NOCs in the region. NOCs in import-dependent countries—such as India’s ONGC, Indonesia’s
Pertamina, and Thailand’s PTT—may need to rework their international strategies as lower prices change their
calculus: although new opportunities to secure overseas acreage and production may be available (and at a
cheaper price), the NOCs also may be forced to backstop a rising trend of GIOC exits from the region. Rather
than engaging in more M&A internationally, ONGC and PTT may be prompted by their own host governments to
refocus on higher-cost domestic exploration and development.

Pertamina has not provided any new revised guidance yet on its strategy following the oil price collapse, but PTT
is likely to revisit its investment plan, prioritizing control of capital and operating costs while maintaining
production. Meanwhile, ONGC’s board is reviewing the company’s activities in light of the price decline, aiming
to optimize operating costs, while India’s national lockdown to contain the spread of the COVID-19 virus has
prompted a temporary suspension of all seismic activity conducted on ONGC’s behalf within India.

Similarly, PetroVietnam is working to address the double impact of the COVID-19 crisis and the oil price
collapse, with the NOC’s contribution to the state budget expected to decline by at least $3 billion this year as a
result. The Vietnamese company’s board of directors is working on a strategy to ensure a structural reduction in
the company’s operating costs, assuming that oil prices will remain low for the foreseeable future. The company
has yet to announce any project delays, but several projects led by foreign operators could be pushed back as the
GIOCs themselves review their near-term spending commitments. Elsewhere in the region, PETRONAS faces
the challenge of selling its gas in an oversupplied global market, as well as potentially having to backfill E&P
projects in Malaysia as GIOCs continue to exit the country. With lower oil prices also straining PETRONAS’s
finances, the company—one of the most global NOCs, with a geographically diverse upstream project portfolio—
may need to prioritize projects at home in Malaysia at the expense of its international projects.

China
In China, the oil price collapse could prove to be a welcome development, lowering the expense to fuel renewed
consumer and industrial demand to get the economy restarted following the national lockdown to contain the
spread of the COVID-19 virus after the initial outbreak in late 2019. As containment measures are slowly lifted,
the Chinese NOCs—CNPC, Sinopec, and CNOOC—are continuing to resume full-scale domestic operations and
cautiously monitoring their overseas business, where their strategies remain largely shaped by the Seven-Year
Action Plan. Adopted in 2018, the plan targets significant growth in domestic reserves and production in response
to a state mandate to safeguard national energy security.

Nevertheless, the global oil price crash is expected to have a more visible impact on the three NOCs in the near to
medium term. Since mid-March, the three companies have changed their rhetoric, vowing “strategic consistency”
in seeking to accomplish operational targets set for 2020, but also hinting at capex cuts. Sinopec announced a
2.5% overall capex cut for 2020 from its 2019 level, while CNPC and CNOOC indicated that their investment
plans will be adjusted to preserve a favorable cash flow level, although neither has provided further details. All
three companies have emphasized cost management, although social obligations (such as creating jobs in China)
could complicate efforts to lower operating costs. The three NOCs have underscored the economics of their
investments as well, which could mean reducing certain less-efficient overseas production to support domestic
output in an effort to strike a balance between commercial considerations and their state mandate.
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IHS Markit | NOCs respond to the price collapse: Spending cuts, project delays, and production shut-ins

Still, none of the three NOCs have indicated plans to delay their major planned development projects, and each of
the companies reiterated their commitment to exploration, especially the frontier exploration in domestic acreage,
in the latest announcements in March. If the Chinese NOCs decide to deprioritize their overseas portfolios in the
near to medium term in favor of domestic growth, renewed enthusiasm for acquiring high-quality overseas
exploration assets could be dampened; on the other hand, with the Chinese NOCs facing tighter cash flows in a
new low oil-price-environment, the temptation to streamline international portfolios will increase, but divestitures
will be hard. Finding buyers for the Chinese NOCs’ holdings in noncore Canadian oil sands and US
unconventionals will be even harder in an oversupplied, low-price market. However, with solid balance sheets and
easy access to financing, the Chinese NOCs are well positioned to weather the market downturn, and with China’s
economy poised to rebound from the COVID-19 lockdown, the country’s NOCs could emerge stronger from the
low-oil-price environment.

Related publications
IHS Markit Insight Conventional supply at risk? Assessing the impact of a lower-price environment on
international oil company portfolios, 23 March 2020.

IHS Markit Insight Company Peer Group Analysis – North American E&P Peer Group: Changes in operational
guidance coming in fast and furious, 16 March 2020.

IHS Markit Strategic Report Uncapped supply and plummeting oil demand threaten further economic distress for
OPEC and former Vienna Alliance producers, 11 March 2020.

Confidential. © 2020 IHS Markit. All rights reserved. 7 4 April 2020

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