Some of the world’s major oil groups wielded the axe on spending and investment plans overnight with a vengeance, with more to come tonight and early next week. All up the cuts and losses in written down asset values topped the $25 billion mark, and that figure is open ended as the groups concerned promised more cuts if oil prices remain weak through the year.
Much of the weight of the cuts will fall on the oil service companies – such as Baker and Hughes, Schlumberger, Halliburton, WorleyParsons, and the drilling firms such as Transocean and Seadrill, and the suppliers of steel pipes and other products, drilling materials, the marine suppliers of tugs, resupply and seismic vessels, and the workers who contract themselves to various projects and companies. These companies have already cut tens of thousands jobs across the globe in recent weeks and there’s more to come.
In Australia Beach Petroleum’s $55 million cut this week (a minimum) and Senex’s $30 million cut last week (and 15% of its work force) are smaller, but no less dramatic for all concerned.
Many brokers in Australia are sanguine about the cuts, saying the fall in the value of the Aussie dollar will help the local companies ride out the gloom, and that seeing their costs are in Australian dollars, these are falling at a time when the falling dollar is boosting returns.
But that’s rubbish at the moment because the 50% – 60% drop in oil prices have far exceeded the fall in the value of the currency, hence the big axes being taken to costs of all types.
And those cuts will fall on employment across the economy, on investment, and on the service companies across the board, and force more job losses, if they haven’t been already happening on the quiet.
The size and speed of these cuts here and offshore (and the spending cuts by Shell and Conoco for example, will be felt here) will badly damage some of the service sector companies and could trigger collapses or forced mergers.
Shell, Conoco, and Occidental led the way overnight, while a big French steel pipe maker for the oil industry, revealed a $US1 billion cut in asset values in something of a surprise.
Shell cut more than $US15 billion in spending plans between now and 2017, with the bulk of the reduction occurring in 2016 and 2017. Shell’s cuts and abandoned projects now exceed $US19 billion alone after it quit a petrochemical project in Qatar earlier this month and made smaller cuts elsewhere.
But compared to its peers, Shell isn’t taking out the really sharp cost cutting axe – just not yet. Its like-for-like capital spending this year will be lower than in 2014, but not by much, it said overnight. Shell spent (excluding purchases) $US35 billion last year and $US38 billion in 2013. The 2016 figure will be much lower – under $US30 billion if that $US15 estimate remains in place.
Shell says it has slowed deepwater oil and gas projects and is reconsidering chemical plants in Pennsylvania and China, Majnoon in Iraq and LNG projects in Canada and Australia. It is already existing some unconventional projects in the US and elsewhere. Shell wrote down the value of its US shale oil and gas assets by $US2.5 billion in 2013 (it had spent $US24 billion assembling these projects). Now more cuts could be on the way.
Interestingly, Shell is aiming to hold exploration spending at around $4 billion, which includes an increase in Alaska and a drop in conventional exploration outside America to less than $US3 billion. This has already seen the company deferring drilling plans in the Gulf of Mexico, offshore China and Malaysia.
How long this can continue is problematic given the size of the cuts other companies are making to their exploration spending – like BHP Billiton which has chopped its spend by 20% already.
ConocoPillips revealed a much steeper 33% cut in its capital spending this year to $US11.5 billion,$US2 billion less than it had suggested in its previous guidance in December. It spent $US17.1 billion in 2014, so the cut is a rather large $US5.6 billion. The company also reported a 59% fall in earnings (Shell’s earnings were up on a year ago, because those in the last quarter of 2013 were depressed by write offs and weak profit margins).
And Occidental Petroleum (the 4th biggest US oil group by value, with Conoco the third largest) said it is cutting 2015 spending by $2.9 billion, or 33%. The company estimated its 2015 capital spending budget at $US5.8 billion, down by a third from 2014 levels, Overall, Occidental reported a loss of $US3.41 billion in the December quarter, compared with a year-earlier profit of $1.64 billion. The loss was after net impairment losses of around $US4 billion related to the sharp fall in oil and gas prices.
America’s second biggest oil group Chevron, reports its 4th quarter figures tonight. It postponed its 2015 budgets last month to take account of the falling prices and other factors. Chevron is spending billions in Australia on two NG projects offshore WA, and one shale gas prospects the Cooper Basin (which looks like to be dropped tonight) with Beach, which has slashed its spending in this area.
French oil major Total has already signalled it will cut capital spending by 10% this year and BP, which reports next Tuesday night our time (ExxonMobil is on Monday night) has already taken a restructuring charge of $US1 billion to pay for group-wide job cuts, with 300 already chopped from the North Sea. It has already sold down its interests in two huge Gulf of Mexico projects and abandoned its position as operator of the projects (which adds extra costs).
And, in a telling announcement which confirms how the impact of the spending cuts is spreading through the non-resource sectors of the global economy, French steel-pipe maker Vallourec SA overnight Thursday revealed said it will write down the value of two pipe making plants in Brazil and Europe by up to $US1.2 billion because of the spending cuts by oil and gas companies.
“Oil markets have experienced substantial levels of turmoil, a situation that has led Oil & Gas companies to announce reductions in capital expenditure for exploration and production,” the company said in a statement released on Thursday night, our time.
