Big oil companies to cut spending again in 2016

Big oil companies to cut spending again in 2016

Big oil companies to cut spending again in 2016
With crude prices at 11-year lows, the world’s biggest oil and gas producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors.

At around $37 a barrel, crude prices are well below the $60 firms such as Total, Statoil and BP need to balance their books, a level that has already been sharply reduced over the past 18 months. International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery.

US producers Chevron and ConocoPhillips have published plans to slash their 2016 budgets by a quarter. Royal Dutch Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead.

Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22 per cent fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy. “This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments,” Bjoernar Tonhaugen, Vice President of Oil and Gas Markets at Rystad Energy, said.

The activities that survive will be those that offer the best returns. But with the sector’s debt to equity ratio at a relatively low level of around 20 per cent or below, industry sources say that companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts.

Few large decisions
With only a handful of major projects approved in 2015, including Shell’s Appomattox development in the Gulf of Mexico and Statoil’s giant $29 billion Johan Sverdrup field in the North Sea, 2016 is also likely to see few large investment decisions.

Projects that could be green-lit include BP’s Mad Dog Phase 2 in the Gulf of Mexico, which the company now expects to cost less than $10 billion, and Chevron’s expansion of the Tengiz project in Kazakhstan, according to Gammel.