Oil majors, governments haggle over sharing pain of deepest cuts yet

By Olga Yagova, Alla Afanasyeva and Dmitry Zhdannikov

LONDON/MOSCOW (Reuters) – From Kazakhstan and Azerbaijan to Nigeria and Angola, oil majors are haggling with national governments over how to share out deep production cuts that add to their pain from low oil prices and depressed fuel sales because of the coronavirus pandemic.

Oil majors have traditionally escaped big cuts in OPEC nations, such as Nigeria, and have never experienced curbs in countries outside the OPEC club, such as Kazakhstan, where they are protected by special clauses agreed with 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 round 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 showed steady output growth in recent years often surprising on the upside 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 locked in difficult talks.

They could amount to a record-high hundreds of thousands of barrels per day (bpd) per major, or 5%-10% of their output based on the exposure to OPEC+ nations and activity in the United States and Canada, where output has also been falling.

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

WEEKS OF TALKS

Azerbaijan asked its main 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% 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% 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 said 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 United States, some 300,000 bpd in Canada and 200,000 bpd in Brazil – areas where majors are also active.

(Additional reporting by Ron Bousso, Julia Payne, Noah Browning, Florence Tan, Mariya Gordeyeva; writing by Dmitry Zhdannikov; editing by Barbara Lewis)