Big Oil Gets Serious on Cost Cuts in Worst Slump Since 1986Will Kennedy and Firat Kayakiran
Major oil companies are awaking from their slumber and facing up to the magnitude of the crash in crude prices.
From Royal Dutch Shell Plc canceling a $6.5 billion project in Qatar to Schlumberger Ltd. firing about 9,000 people and Statoil ASA giving up exploration in Greenland, the oil industry this week concluded that the slump is no blip. Top producers follow U.S. shale developers such as Continental Resources Inc. in unraveling a boom that produced more oil and natural gas than the world is ready to buy.
And there’s certainly more unwinding to come. For most of this month, crude oil has traded below $50 a barrel, a level few predicted even two months ago when OPEC signaled it wouldn’t cut production to defend prices. If the market stays this depressed, global spending on exploration and production could fall more than 30 percent this year, the biggest drop since 1986, according to forecasts from Cowen & Co., a New York-based investment bank.
“Not too many people expected these levels of oil prices, not even the companies themselves,” said Dragan Trajkov, an analyst at Oriel Securities Ltd. in London. “Now they have to deal with this new situation and the first impact will be on new investments.”
Shell, BP Plc, Chevron Corp. and other top producers will signal plans for this year when they present 2014 earnings to investors this month and in early February. Their chief executive officers are faced with the challenge of assuring shareholders they can see through the depression without cutting dividend payments.
The direction of the oil market shows companies probably need to prepare for the worst. Bank of America Corp., noting the speed global oil inventories are building, forecast Thursday that Brent futures are set to fall to as low as $31 a barrel by the end of the first quarter from about $48 now. That’s even lower than the $36.30 seen during the depths of 2008’s financial crisis.
“In the upstream side, the business has been very lazy,” Samir Brikho, CEO of U.K. oil and gas engineer Amec Plc, said in an interview in London, referring to oil producers. “They didn’t want to make any changes and the costs were keeping up and keeping up and now we have the prices down, everybody is saying ‘what are we going to do?’”
Oil traded above $100 a barrel in July and analysts forecast prices would stay there for years to come. The scale and speed of the price drop has forced companies to start making significant decisions.
Shell, Europe’s largest oil company, took the ax this week to a $6.5 billion petrochemicals plant it planned to build in Qatar in partnership with the state producer. The company, based in The Hague, said the project wasn’t economically feasible in the current price environment.
Schlumberger, the world’s biggest oilfield-services company, took a $1.77 billion charge in the fourth quarter and said it will cut about 9,000 jobs, 7.1 percent of its workforce, as it anticipates lower spending by customers.
BP, based in London, cut 300 positions in Scotland, arguing this was necessary to ensure that its business stayed competitive. The local trade union said it expected many more of its members in the industry would lose their jobs.
Workforces have also started shrinking in Canada’s oil sands. Suncor Energy Inc., the country’s largest oil producer, said on Jan. 13 it would reduce its staff by 1,000 as it cut spending on new projects. The producer will make additional moves to protect its finances if required, Chief Financial Officer Alister Cowan said Thursday in Calgary.
“We want to live within our means and, if the price remains low, we’ll take further action,” Cowan told reporters, declining to elaborate.
Some of the biggest reductions in investment are coming from the U.S. shale oil producers, the part of industry that did most to boost output and set the price crash in motion. Continental Resources, the biggest operator in the Bakken shale formation in North Dakota, slashed its 2015 spending plan by 41 percent last month to $2.7 billion.
Range Resources Corp., the dominant gas explorer in the Marcellus Shale region of Appalachia, cut its 2015 spending plan by 33 percent to $870 million. Output will expand 20 percent this year, less that the 24 percent growth in 2014, the Fort Worth, Texas-based company said Thursday.
“Persistent low oil prices are pushing all the producers to focus on cutting costs and delaying investments,” said Tony Durrant, CEO of London-based Premier Oil Plc. “Oil companies are re-evaluating their investment plans and most of the unapproved projects get delayed.”
Based on oil prices averaging $70 a barrel this year, Cowen’s annual survey of exploration and production spending predicts expenditure will drop by 17 percent to $570 billion. That’s worse than the 15 percent drop seen in 2009.
If oil averages $60 a barrel, the cuts will worsen to 30 percent to 35 percent, according to the Jan. 7 report from analyst James Crandell, who first started the survey in 1982.
The industry slump in spending may last beyond this year, analysts at Danske Bank AS said in a note.
“The OPEC price war and market share and lagged supply reaction implied continued oil weakness,” they said. “We expect squeezed E&P cash flow to force capex and dividend cuts for 2016 too.”
Shell rose as much as 1.1 percent to 2,089 pence in London on Friday and was trading at 2,075.5 pence at 11:54 a.m. Statoil gained 1.6 percent in Oslo, while Suncor fell 1.9 percent in Toronto yesterday.