More Oil Spending Cuts Coming as U.A.E. Warns About Supplies

  • WoodMac, IEA see spending cuts exceeding $300 billion by 2017
  • U.A.E. minister concerned that low investment will curb supply

International oil companies will probably cut investment spending about $370 billion this year and next, according to Wood MacKenzie Ltd., just as the United Arab Emirates warned that the “massive” number of projects being delayed because of the drop in crude prices could create a future shortage.

Further investment cuts will mean a 3 percent reduction this year in oil and natural gas production, equivalent to 5 million barrels of oil, and another 4 percent, or 6 million barrels, in 2017, Jessica Brewer, a Middle East analyst for WoodMac, said in an interview at the company’s Dubai office Thursday. The global oil industry has postponed a number of projects, raising the risk of a slump in output and a potential shortfall in supply, U.A.E. Energy Minister Suhail Al Mazrouei told reporters in Abu Dhabi Thursday.

Benchmark Brent crude plunged from more than $115 a barrel in June 2014 to less than $28 in January this year, and traded below $48 Thursday. The decline has forced explorers to delay projects, cancel billions of dollars of investments and eliminate thousands of jobs. Patrick Pouyanne, chief executive officer of Total SA, France’s largest oil company, said last month that investment cuts in the industry threaten to cause an oil shortage by 2020.

‘Toward Balancing’

“This is what we are concerned about,” Al Mazrouei said. “The number of postponed projects is massive.” Decreased investment in oil production can crimp supply in the future, even as “the market is moving toward balancing,” he said.

The heads of Exxon Mobil Corp., BP Plc, Total and Italy’s Eni SpA are scheduled to join Al Mazrouei and the chief executive officer of Abu Dhabi National Oil Co. next week in Abu Dhabi for the largest oil conference in the U.A.E. capital to discuss global supply and demand and the industry’s future.

Not everyone takes such a bleak view. “We think investment will be growing rather than falling,’’ Ed Morse, head of commodities research at Citigroup Inc., said by phone Thursday. The bank sees Brent crude rising to $60 a barrel in the third quarter next year and to $65 in the following three months, enough to spur spending, he said.

“It’s all price related,’’ Morse said. “You need $50 or above sustained for three months before boards will be confident about spending money again.”

The International Energy Agency estimates spending in exploration and production fell 25 percent in 2015 and will decline by the same amount this year, cutting more than $300 billion in investment. It sees no signs companies will resume spending in 2017.

“Companies are going to be cautious” about deciding on new investments, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said by phone. “I don’t think anyone will be jumping back in with a significant increase in capital investment next year.” Prices will average about $60 a barrel next year, Bernstein forecasts.

Spending cuts in capital investment that have already been made and deferred projects will amount to $1 trillion for the period from 2014 to 2020, according to WoodMac. By the end of the decade, those projects that didn’t go ahead will account for the equivalent of about 3 million barrels a day of supplies. Most Middle Eastern producers have moved ahead with projects, Brewer said.

“We in the U.A.E. are trying not to postpone projects in a major way,” Al Mazrouei said. “All projects around the world should be equal to the amount of demand.”

The Organization of Petroleum Exporting Countries is debating production cuts aimed at increasing prices. Investment is likely to resume in 2018 if prices stay at least at $50 a barrel as demand rises, Beveridge said. “There is a price that will bring back some investment but not too much to flood the market.’’

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE