With crude at $50, oil firms fear deeper crisis than in 1980s

Rishabh Digha Steel and Allied Products

05/08/2015 14:56

* Companies slash $180 bln in spending in 2015 
    * Oil sector could deepen cuts due to low oil price 
    * Downturn shaping up to be worst in over 30 years 
 
    By Ron Bousso 
    LONDON, Aug 5 (Reuters) - After slashing spending by $180 
billion to deal with one of the worst industry downturns in 
decades, oil companies are still bleeding cash and slipping 
further into debt to maintain dividends to shareholders.  
    Depressed crude prices - at below $50 a barrel Brent crude 
is half what it was a year ago - mean even more cuts are needed 
at new projects and existing operations. Companies trying to 
dispose of oilfields to raise cash could be forced to sell 
quickly and for less than they hoped.  
    There is little sign that the oil price will come to the 
rescue as the Organization of the Petroleum Exporting Countries 
(OPEC) continues to pump hard into an oversupplied crude market 
in response to explosive growth in U.S. shale oil.  
    Brent is expected to average $60.60 in 2015 and $69 in 2017, 
according to a Reuters poll of analysts. The International 
Energy Agency said in February it saw it recovering to $73 in 
2020 as the supply glut slowly eases.  
    Analysts at investment bank Jefferies say international oil 
companies lowered their break-even points by $10 a barrel after 
the latest round of spending cuts, but will still need a price 
of $82 a barrel in 2016 to cover spending and dividends, which 
have been the main investment attraction for the sector for 
decades.  
    "In order to cover the shortfall, the sector will increase 
its borrowing. While leverage remains manageable within the 
sector, this is not a practice that can continue in perpetuity," 
Jefferies said in a note on Wednesday.  
    Oil majors such as Royal Dutch Shell  RDSa.L , Chevron 
 CVX.N  and Total  TOTF.PA  are helped by profitable refining 
operations. Most are increasing oil and gas output, squeezing as 
much revenue as they can from past investments but exacerbating 
the oversupply.  
    Spending next year is expected to decline by a further 5 to 
15 percent depending on the oil price, according to Oslo-based 
consultancy Rystad Energy. The world's top oil companies used 
second-quarter results to show they were ready for deeper, more 
painful measures. ID:nL5N1080B8   ID:nP6N0X601R   ID:nL1N10B12Q  
    "The tone has changed. Maybe we didn't quite create the 
right impression of urgency back in January," said Shell Chief 
Executive Officer Ben van Beurden.  ID:nL5N10A1AS   
    BP Chief Executive Bob Dudley said "oil prices will be lower 
for longer".  
    Part of the problem for the oil majors is that large 
national oil companies and shale producers have increased their 
share of global production gradually for years, leaving the 
majors victims of forces largely beyond their control.  
    Their heavy investment cuts are expected to lower global 
production capacity by 2 million barrels per day by 2020, 
according to Rystad Energy. But OPEC producers will only move in 
to make up the shortfall. 
    "This has been really a tough time for the industry from 
Aberdeen to Angola to Houston ... It does feel like 1986," BP 
 BP.L  CEO Dudley said last week after a near two-thirds drop in 
quarterly profit.  ID:nL5N1080VO   
    In late 1985, oil prices slumped to $10 from around $30 over 
eight months as OPEC raised output to regain market share 
following an increase in non-OPEC production. The industry 
responded by cutting spending by nearly a quarter and slashing 
its workforce by a third, according to Morgan Stanley. Prices 
gradually recovered over the next decade as global demand rose.  
    But today's supply overhang could last much longer. "If oil 
prices follow the path suggested by the forward curve ... this 
downturn would be more severe than that in 1986," Morgan Stanley 
said in a note. 
    The $180 billion of cuts this year represent roughly a 20 
percent drop from 2014, according to Rystad. Oil companies have 
deferred up to $200 billion worth of projects including complex, 
expensive ventures that hold huge resources, such as Canadian 
oil sands and deepwater projects in Africa, Southeast Asia and 
the Arctic.  ID:nL5N0Z22WR  ID:nL8N0ZM1PI  
    Production lags investments by a minimum of six months for 
onshore drilling, but up to ten years for complex deepwater 
fields, liquefied natural gas projects or Canadian oil sands 
mega projects.  
        
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    GRAPHIC: Impact of delayed oil and gas project http://link.reuters.com/bys35w 
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    Some observers say the industry needed an efficiency drive 
with or without the oil price slump, after operating costs 
tripled over the past five years.  
    BP found it easier to adapt to the halving of oil prices 
because it had already sold $45 billion of assets and lowered 
costs to cover the huge clean-up and fines from the 2010 Gulf of 
Mexico spill.  
    "BP is probably the most advanced among these companies in 
actually achieving the cost savings," said Jefferies analyst 
Jason Gammel, who holds a "buy" rating on BP and Chevron.  
    For now, the oil majors can cover the shortfall by higher 
borrowing, which currently averages around 15 percent of their 
market value - still relatively low compared with other 
industries.  
    Smaller exploration and production companies that lack big 
refining operations such as Premier Oil  PMO.L  and Tullow Oil 
 TLW.L  have been forced to abandon dividends this year.  
    Tullow executives said the company had "reset the business" 
to be competitive at an oil price around $50. Like its peers, 
the Africa-focused company has slashed spending on new projects 
and shifted away from complex wells to focus on onshore and 
simpler offshore plays.  
    Tullow arranged financing before the oil price drop and that 
means it can weather the downturn for now, say analysts at 
Morningstar. But they said Tullow's cash flow burn means it must 
eventually sell assets which, with oil where it is today, would 
probably fetch a depressed price.  
    Tullow's interests in major oil discoveries being developed 
"will require far more capital than any company of its size can 
possibly generate from its operations," Morningstar said.  
 
 (Additional reporting by Michel Rose in Paris, Ernest Scheyder 
and Anna Driiver in Houston, Stephen Jewkes in Milan and Stine 
Jacobsen in Oslo) 
 ((ron.bousso@thomsonreuters.com; +44)(0)(2075422161; Reuters 
Messaging: ron.bousso.reuters.com@reuters.net)) 
 
Keywords: OIL MAJORS/