The Drop in Oil Prices Will Lead to Slashed Budgets for Oil Companies

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The Drop in Oil Prices Will Lead to Slashed Budgets for Oil Companies

Oil Prices Falling Will Lead to Slashed Budgets

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By Tim Maverick, Commodities Correspondent

 

The 45% collapse in oil prices since mid-June means one thing for certain . . .

The oil industry will adjust its capital spending plans downward to match the current oil climate – particularly for higher-cost projects like the Canadian oil sands.

Even for a powerhouse like ExxonMobil (XOM), oil at $65 per barrel means a cash shortfall of $15 billion a year if it doesn’t adjust its operations. Its capital budget is expected to come in at $35.3 billion.

Other companies are sure to adjust their practices soon.

A Poor Track Record

Low oil prices put even more pressure on many of the major oil companies that haven’t had much luck making new discoveries in the past 10 years.

Andrew Lodge, the Exploration Director at Premier Oil, told Reuters, “In the heyday of 2001–2002, the average rate of return [on its capital expenditures] for the industry was 20% . . .  that dropped last year to around 10%.”

The evidence is clear – for about 50 years, mega fields were being discovered left and right. But only a few have been discovered more recently, and mainly by Norway’s Statoil ASA (STO). Around 75 new oil fields were developed in the past decade, according to Nicholas Green of Bernstein Research. But in 2015, the number of new, conventional oil field developments will be less than 50.

And that’s despite the fact that the major oil companies have increased their exploration budgets by three to five times in recent years – they assumed high oil prices were here to stay.

“$1 Trillion Will Be Cut”

The investment bank concluded that nearly $1-trillion worth of spending on oil projects is at risk!

Goldman went on to say such cancellations could deprive the market of about 7.5 million barrels per day of output by 2025. That translates to 8% of current global demand.

The bank believes oil companies will need to cut spending on projects by about 30% to make many of them economically viable even at $70 per barrel. In effect, many of these projects will simply have to be eliminated as Goldman says.

Oil Projects Under Threat: Comercial Breakeven Rates for Major Projects

The Goldman research is backed up by similar research from energy consultancy Wood Mackenzie. It says the oil industry could slash a quarter of its previously planned capital spending over the next five years. The firm said that by 2018, this translates to $250 billion annually.

The Long and Short

What does this mean for the future course of oil prices?

In the short term, probably very little.

But long term, a lot. Less spending on projects will, as Goldman forecasts, mean less oil in the marketplace. And less oil means higher prices . . .  eventually.

And “the chase” continues.

Tim Maverick

The post The Drop in Oil Prices Will Lead to Slashed Budgets for Oil Companies appeared first on Wall Street Daily.
By Tim Maverick