Oil Firms Deepen Cost Cuts as Price Recovery Remains Elusive

 

The sector has slashed jobs, projects and investments to cope with a 60 percent downturn in crude prices over the past two years, with consultancy Wood Mackenzie putting the drop in exploration and production spending by the top 56 oil and gas firms at 49 percent, or $230 billion, over the period.

 

But hopes for a steep recovery in prices have been dashed by persistent oversupply, meaning companies must keep hammering costs for at least another year, industry players gathered for a conference in Norway's oil capital, Stavanger, said.

 

Ryan Lance, chief executive of ConocoPhillips (COP), the world's largest independent oil company, said the key was to lower the breakeven costs of projects "as much as you can" and to try to keep some cash flexibility.

 

"You'd better not have everything tied up in very large projects because you may have to deal with a 70 percent decline in revenues over six months," he said.

 

"Cost-cutting is going to continue," Lance said.

 

On Monday, Norway's Statoil (STO) said it had managed to reduce costs further on the initial phase of its giant Johan Sverdrup field, the largest North Sea oil find of the last three decades, to 99 billion crowns ($12 billion) from an original forecast of 123 billion crowns.

 

The company is reviewing its entire portfolio to identify projects that could be developed with better concepts, more efficient drilling and standardised methods, all in an effort to bring down its breakeven costs further.

 

Others are doing the same. The cost of developing the Zidane gas field off Norway has been cut by 20 percent, John Browne, executive chairman of Russian billionaire Mikhail Fridman's investment vehicle LetterOne, told the conference. LetterOne controls DEA, which operates the field.

 

The potential return to the market of some 1.5 million barrels per day of oil supply from Libya and Nigeria plus uncertainty about Iranian and Iraqi production could push a rebalancing further away than many in the industry are hoping.

 

"The oversupply will extend into 2017," Lance said.

 

Wim Thomas, Shell's chief energy adviser, told Reuters: "All these things, when they come back on the market, can again postpone the true balancing."

 

The most upbeat scenario from Thomas was for the market to rebalance later this year. "It can happen any time between the second half of this year and the second half of next year."

 

Statoil CEO Eldar Saetre, also speaking to Reuters, said: "It can be a long time into 2017 before we see the inventories situation normalise itself."

 

In the meantime, oil companies will have to protect margins as they do not want to suspend payments to shareholders.

 

Dividends Protected
"The majors will not cut dividends," said Pareto Securities analyst Trond Omdal, noting that Shell had not reduced such payouts since World War Two. He believes oil companies have room to lower costs further.

 

"They can continue to cut capex through postponing projects, optimalising and simplifying new project designs, cooperate better with suppliers and/or squeeze margins," he said.

 

Companies may also opt to increase scrip dividend programmes, meaning the offering of new shares at a discount as an alternative to cash dividends.

 

"In 2017 oil firms will still give priority to dividends above greenlighting new projects," said Swedbank analyst Teodor Sveen-Nilsen.

 

"They would rather pay dividends than sanction new projects."