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[LONDON] The world's oil companies are awaking from their slumber and facing up to the magnitude of the crash in energy prices.
From Royal Dutch Shell canceling a US$6.5 billion project in Qatar to Suncor Energy firing workers in Canada and Statoil ASA giving up exploration in Greenland, large producers this week concluded that the slump is no blip. They follow US shale developers such as Continental Resources 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 US$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 per cent this year, the biggest drop since 1986, according to forecasts from Cowen & Co.
"Not too many people expected these levels of oil prices, not even the companies themselves," said Dragan Trajkov, an analyst at Oriel Securitiesin London. "Now they have to deal with this new situation and the first impact will be on new investments." Shell, BP, Chevron and other top producers are preparing to present 2014 earnings to investors at the end of this month or early February and will signal plans for this year. 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 US$31 a barrel by the end of the first quarter from about US$48 now. That's even lower than the US$36.30 seen during the depths of 2008's financial crisis.
Oil traded above US$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 axe this week to a US$6.5 billion petrochemicals plant it planned to build in Qatar in partnership with the state oil producer. The company, based in The Hague, said the project wasn't economically feasible in the current price environment.
BP, based in London, cut 300 positions in Scotland today, 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.
North America Workforces have also started shrinking in North America. Suncor, Canada'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 today in Calgary.
"We want to live within our means and, if the price remains low, we'll take further action," Mr Cowan told reporters, declining to elaborate.
Some of the biggest reductions in investment are coming from the US shale oil producers, the part of industry that did most to boost production 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 per cent last month to US$2.7 billion.
Marcellus Shale Range Resources Corp., the dominant gas explorer in the Marcellus Shale region of Appalachia, cut its 2015 spending plan by 33 per cent to US$870 million. Output will expand 20 per cent this year, less that the 24 per cent growth in 2014, the Fort Worth, Texas-based company said in a statement on 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 oil spending will drop by 17 per cent to US$570 billion. That's already worse than the 15 per cent drop seen in 2009.
If oil averages US$60 a barrel, the cuts will worsen to 30 per cent to 35 per cent, 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 today.
"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 2.9 per cent to 2,066 pence in London on Thursday, reducing its loss for the year to 4.1 per cent. Statoil gained 3.3 per cent in Oslo and Suncor fell 1.9 per cent in Toronto.
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