Global oil and gas majors announce major spending cuts as industry stares at oil at $30

New Delhi: Global oil and gas majors across the world have announced major cuts and austerity measures as the industry stares at oil prices below $30 in 2020, with major economies around the globe implementing travel restrictions and lockdowns to deal with the ongoing Covid-19 pandemic.

To make matters worse for oil and gas companies, the industry is in the midst of an oil market share war between two of the world’s largest oil and gas producers Russia and Saudi Arabia.

Consultancy firm Rystad Energy said in a report that $100 billion could be cut away from Exploration and Production companies budgets in 2020 and the reduction could grow further to $150 billion in 2021 in a $30 scenario.

Rating agency Moody’s has projected the oil price decline in 2020-21 will reverse in the medium term. “Unlike a few years ago, we see this decline as being mainly driven by cyclical factors (set off by the coronavirus shock to the global economy) and therefore have not changed our expectation that in the longer term oil prices average around the midpoint of our medium-term oil price range of $50-$70/barrel,” Moody’s said in a statement.

The agency noted that in light of many E&P companies announcing capital spending cuts, drilling and oilfield service companies (OFS) will have to deal with lower revenue and earnings.

Royal Dutch Shell

The latest austerity measures were announced by the British-Dutch multinational oil and gas company Royal Dutch Shell on Monday. The company announced reduction of underlying operating costs by $3-4 billion per annum over the next 12 months compared to 2019 levels along with reduction of cash capital expenditure to $20 billion or below for 2020 from a planned level of around $25 billion.

“Together, these initiatives are expected to contribute $8-9 billion of free cash flow on a pre-tax basis. Shell is still committed to its divestment programme of more than $10 billion of assets in 2019-20 but timing depends on market conditions,” the company said in a statement.

Total S.A.

French multinational oil and gas company Total S.A. too announced measures to combat the fall in oil prices. Chairman and Chief Executive Officer (CEO) Patrick Pouyanné while addressing the group’s employees on Monday talked about two core strategies on organic pre-dividend breakeven of less than $25 per barrel and low gearing to face high volatility.

Pouyanne unveiled the group’s strategy to cut organic capex by more than $3 billion, savings of $800 million on operating costs in 2020, from $300 million announced earlier along with a suspension of buyback program.

The company had earlier announced a $2 billion buyback for 2020 considering a $60 per barrel oil price; it bought back $550 million in the first two months.

ExxonMobil

American multinational oil and gas company ExxonMobil had last week announced evaluating significant near-term capital and operating expense reductions.

“Based on this unprecedented environment, we are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term. We will outline plans when they are finalized,” Darren Woods, chairman and chief executive officer said in a statement.

BP

Bernard Looney, the new CEO of British multinational oil and gas giant BP in a statement indicated that the company will reduce capital and operational spending in light of the pandemic.

“To protect the health of our company we are making interventions to reduce capital and operational spending. bp is strong and, importantly, we have navigated challenges like this before. We know what to do,” Looney said in a post on 13 March.

ConocoPhillips

American multinational oil and gas giant ConocoPhillips also last week announced plans to reduce capital spending by 10 per cent in 2020.

"We're reducing our 2020 capital program by approximately 10 per cent or $700 million. We'll source these reductions from decreases in operated and expected decreases in non-operated development activity in the Lower 48 and deferral of development drilling programs in Alaska,” Ryan Lance, chairman and CEO of the company told analysts in market update conference call on 18 March.

Lance added that the reductions will impact 2020 production by about 20,000 barrels per day of oil equivalent and the company will reduce share repurchases from a run rate of $750 million per quarter to $250 million per quarter, starting in the second quarter. The measures taken would result in about $2.2 billion of planned 2020 cash uses that will not be deployed.

Chevron Corporation

American multinational energy corporation Chevron was one of the first oil majors to confirm and announce reduction in capital expenditure for the year. "We are reviewing alternatives to reduce capital expenditures, that are expected to lower short-term production and preserve long-term value,” it said in a statement to Reuters in early March.

The company is targeting $2 billion in savings through cost savings.