Fair share of oil production cuts: Firms haggle with governments

From Kazakhstan and Azerbaijan to Nigeria and Angola, oil majors are haggling with national governments over how to share out coronavirus-driven production cuts. Those deep cuts are intensifying the pain caused by low oil prices and depressed fuel sales.

Oil majors have traditionally escaped big cuts in OPEC nations, such as Nigeria. They have never experienced curbs in countries outside the OPEC cartel, such as Kazakhstan, where they are protected by special clauses agreed to by those governments.

But those production sharing agreements (PSA) are being laid aside following a pact between the Organization of the Petroleum Exporting Countries and its allies (OPEC+) to cut production by 23 percent to bolster prices as coronavirus lockdowns reduce global energy demand by a third.

Such unprecedented output reductions, effective from May 1, are impossible in most nations without the help of majors.

“We do expect to see volumes reduce in the second quarter because of the OPEC+ agreement,” BP’s chief executive Bernard Looney told a conference call on Tuesday, as the London-based company reported a plunge in profit and a spike in debt.

During the last oil price crash in 2014-2016, integrated majors, such as BP, suffered a decline in earnings from their upstream or oil production units but were saved by strong downstream results as consumers profited from cheap fuels.

This time around is different.

BP said it expected significantly lower refining margins in the second quarter when global restrictions on movement to halt the spread of the virus reach their peak, throttling consumption of gasoline, diesel and jet fuel.

Add to this, forced production cuts across the world, and majors face a perfect storm.

BP, Royal Dutch Shell, Total, and Eni have shown steady output growth in recent years, as they tried to lure investors with solid performance and generous dividends to offset pressure from climate change activists.

It is not yet possible to predict exact production cuts as majors, and many governments are still in difficult talks.

The cuts, however, could amount to a record-high of hundreds of thousands of barrels per day (bpd) per major. That is the equivalent of 5 -10 percent of their output based on their exposure to OPEC+ nations and activity in the United States along with Canada, where output has also been falling.

Analysts from Barclays said BP’s first-quarter production was 1 percent below their forecast and down 3 percent year-on-year. Jason Gammel from Jefferies said BP’s second-quarter output was poised to be even lower.

Week of talks

Azerbaijan asked its leading giant offshore consortium to cut output by 80,000 barrels per day, resulting in a net cut for operator BP of around 30,000 bpd.

“We have never done it before since they came to the country in 1994,” a senior Azeri official told Reuters.

Looney said BP was also in talks with Russia, where it holds 20 percent in oil major Rosneft, and with Angola and in the Middle East.

In Kazakhstan, ExxonMobil, Chevron, Eni, Total and Shell have all been in talks with the government over cuts at three giant projects – Kashagan, Karachaganak, and Tengiz, five industry sources said.

The majors produce 60 percent of Kazakhstan’s output of 1.7 million bpd, making it impossible for the country to meet its OPEC+ cut quota of 390,000 bpd without the majors.

“Kazakh authorities hired lawyers and have been trying to figure out how to force PSA projects to cut. It’s been two weeks of non-stop talks”, a source familiar with the talks said.

In Nigeria, Shell and other majors are also holding talks with national oil firm NNPC on reducing onshore and offshore production, according to seven trading sources.

“Nigeria and other West African exporters have no choice now but to cut down on shipments,” one trading source told Reuters News Agency, citing poor demand and loss-making prices.

Shell and Total will have to share the burden of the 285,000 bpd cut by Oman while Iraq is still talking to majors, such as Exxon and BP, on the exact split of its 1 million bpd cut.

Beyond OPEC+, more than 600,000 bpd of cuts have already been announced in the US, some 300,000 bpd in Canada, and 200,000 bpd in Brazil – areas where majors are also active.