Big Oil Slashing Spending Amid Low Prices

By Nick Cunningham | Thu, 11 December 2014 22:03 | 0

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Oil prices continue to slide in mid-December, slumping towards another key threshold of $60 per
barrel.

Oil prices hit a five-year low on December 10. While many major oil players have gone to lengths to
assure markets that they can weather the price downturn and indeed it is far from clear how long
the current price collapse will last low prices are clearly starting to have an impact on major
investment decisions. Drilling permits dropped by 36 percent between October and November, and
the number of rigs in operation continues to fall.
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Many oil companies are beginning to pare back capital expenditures, reconsidering pouring billions
of dollars into expensive projects that may or may not be profitable in the current environment.

ConocoPhillips announced on December 8 that it would slash capital expenditures in 2015 by 20

percent, dropping its spending budget to $13.5 billion. And in a sign that the oil price slump is
starting to take a major toll on future investments, ConocoPhillips said that it would defer
significant investment on its projects that are in their earlier stages, such as its fields in the
Montney and Duvernay in Canada, along with its holdings in the Permian basin and the Niobrara.

Related: Who Comes Out On Top After Oil Pandemonium?

BP is also hoping to cut costs. It expects to lay off workers and trim spending, perhaps by as much as
$2 billion. It is unclear how much spending the oil major already had planned to cut, as it continues
to downsize after steep losses stemming from the Deepwater Horizon disaster in 2010, but a
company spokesman said the drop in oil prices has increased our focus on these activities. In an
investor presentation, BP said that it usually approves new projects when oil prices are at $80 or
higher.

Chevron decided to delay the release of its budget, perhaps because of how volatile the oil markets
have become in the fourth quarter of this year. According to an average of analyst predictions,
market watchers think Chevron will slash its budget by 11 percent next year.

Oil majors Royal Dutch Shell and Total are ahead of the curve, having implemented cost cutting and
divestment measures earlier this year before oil prices dropped. Total may further put off
investment in the North Sea over the next two years.

Cenovus Energy, a Canadian oil sands producer, announced it would cut spending by 15 percent,
refocusing its cash on its producing assets. For its part, EOG Resources will sell off its Canadian assets
and lay off its employees based there.

But there are smaller firms that are in a much tougher position because they lack a footprint in
downstream sectors, which helps insulate some of the larger integrated companies. Goodrich
Petroleum has seen its stock collapse by more than 87 percent since July. It has debt three times
higher than its market value and is drilling in expensive regions in Louisiana and Mississippi. The
situation is darkening for the Houston-based company it is now seeking to sell its Eagle Ford assets
in a desperate bid to raise cash. Goodrich will axe its spending by half for 2015.

Oasis Petroleum, another Houston-based exploration company, will also halve its 2015 budget,
lowering it to $750-$850 from $1.4 billion it expects to spend this year.

Related: Will OPECs Decision Lead To The End Of The American Shale Dream?

Oil field services companies are also feeling the heat. Schlumberger and its peers will cut prices for
their services in order to maintain interest, but a downturn in drilling will hit the sector hard.
Schlumberger is ridding itself of about one-third of its fleet of boats, writing off $800 million.

There isnt an obvious reason to think that oil prices will turn up anytime soon. OPEC announced on
December 10 that it expects demand for its product to hit the lowest levels in 2015 since 2003. It
expects markets to demand 28.9 million barrels per day, lower than the groups current production
level of about 30.5 million barrels per day.

The only hope for the industry in the near term is Saudi Arabia making an about-face from its
position in Vienna in November. With oil prices nearing $60 per barrel, all eyes are on OPECs de
facto leader. But the Saudi Oil Minister poured cold water on that possibility on December 9. Why
should I cut production? Ali Al-Naimi said told reporters in Lima, Peru, according to Bloomberg.
This is a market and Im selling in a market. Why should I cut?

By Nick Cunningham of Oilprice.com