Oil Search considers cutting Papua New Guinea oil output from July
Oil Search chief executive Keiran Wulff has revealed that the Papua New Guinea oil and gas producer may take the drastic step of temporarily shutting down oil production from July as it baulks at selling cargoes at rock-bottom prices.
Dr Wulff told the Macquarie Australia Conference that while Oil Search had sold forward its crude oil through to June, it was looking at options for oil that would be produced from July, given very soft prices amid full stockpiles around the world.
Those include reinjecting condensates into the fields, or shutting down fields until prices improve, with discussions underway with the PNG government.
"Right now we are currently looking at whether we will continue to do production – at this stage it’s our intention to," he said.
"We have forward sold our crude through to June, we are currently in the market for our July volumes and we will make a decision shortly as to whether or not we will continue with our marketing or whether we will shut in our crude for a short period of time. Some of those discussions obviously need approvals."
Dr Wulff said it wasn't a question of not being able to find a buyer for Oil Search's PNG blend of crude, but of the prices that were available in July, given the unprecedented global oversupply amid the COVID-19 pandemic.
LNG production at the ExxonMobil-operated PNG LNG venture, which had been producing beyond its rated capacity, would continue unaffected, he said.
The PNG LNG venture was recently reported to have sold a spot cargo of LNG at a record low price of below $US2 per million British thermal units, but Dr Wulff said he was "comfortable" with the venture's high production rates, which exceed contracted sales.
Twin shocks cause price crash
Brent crude has crashed from about $US67 a barrel at the start of the year on the twin shocks from COVID-19 and the collapse of a supply cut agreement by OPEC and Russia. While the OPEC+ alliance has since been revived with a deeper production cut, the slump in demand caused by the pandemic saw Brent dip below $US20 last month and warnings it could follow the US benchmark grade into single figures or even into negative territory.
Several other companies around the world have decided to shut in wells to avoid selling at super-low prices, and some higher-cost fields in Western Australia have been cited by analysts as potentially vulnerable to a shutdown if prices don't recover.
Brent was trading up 4.4 per cent at $28.39 a barrel on Tuesday afternoon, with the increase lifting share prices across the sector, including gains of 3 per cent at Oil Search and 5.1 per cent at Santos.
The commodity price collapse caused Oil Search last month to raise $1.16 million in new equity to address market concerns about its balance sheet. It has slashed capex this year by 40 per cent, delayed an oil project in Alaska and cut about 100 jobs from offices in Sydney and Anchorage, as well as cutting salaries across the business. Dr Wulff said production costs that had been targeted to fall to $US11 to $US12 per barrel of production were now targeted at less than $US10 a barrel. In addition, ExxonMobil was examining steps to cut costs at PNG LNG, he said.
He said Oil Search expected to spend $US200 million to $US300 million on capex for the rest of the year, and 2021 budgets hinged on the price outlook.
Separately, Santos chief executive Kevin Gallagher said the Adelaide-based firm would continue to monitor the hedging market to see if it made sense to put in hedging for 2021, acknowledging that hedging in place for this year had "proved to be prudent".
The combined impact of the hedging and Santos' domestic gas business meant 70 per cent of its production for the rest of the year was fixed price and didn't hinge on commodity prices, Mr Gallagher noted.
Given work to cut costs, he was confident Santos' business would be cash flow positive this year even without hedging, which was at an average oil price of about $US39 a barrel.