WITH thickening uncertainties in the global market and a continued wave of industry spending cuts, oil majors are bracing for a $10 per barrel oil price.
They have announced significant reductions to spending as prices crashed to $20.
“No one can exactly be sure that production will be shut-in fast enough to not overwhelm our ability to store oil,” JBC Energy said in a statement.
The firm pointed to refineries cutting processing because they are running out of storage, such as Exxon’s Baton Rouge.
“In such an environment, it is as possible for Brent prices to briefly go to $10 per barrel as it was back in 1986 or 1998,” JBC Energy said.
Royal Dutch Shell said it would cut spending by 20 per cent, or about $5 billion, and also suspend its share buyback plan. French oil giant Total SA and Norway’s Equinor announced similar moves.
ExxonMobil and Chevron have suggested they too would be axing their budgets, with Exxon under particular pressure. Goldman Sachs estimates that Chevron needs $50 per barrel in order to cover spending and its dividend. ExxonMobil, on the other hand, needs something like $70.
The companies are more insulated from the downturn than small and medium-sized shale drillers because they have downstream refining and petrochemical assets that have typically performed somewhat better than upstream units when prices fall.
Refineries, for instance, spend less on oil during the downturn, and low prices also translate into a boost in sales of refined products.
Earlier in the week, Exxon announced that it was cutting production at its Baton Rouge refinery, the company’s second largest in the U.S., because poor demand has filled up storage tanks. Exxon also cut 1,800 contractors from the site. In another example, a major closely-watched petrochemical project in Appalachia may not go forward as the market sours.
The first round of spending cuts from the oil industry is now visible, but a second round is beginning, according to a report from Goldman Sachs.
“We see U.S. oil production falling almost 1.4 million bpd over five quarters post 2020 based on reduced drilling (i.e., before considering shut-ins of existing wells that are likely to be needed) with covered company capex down 35 per cent (year-on-year) in 2020,” Goldman Sachs wrote in a note.
However, budget revisions are not over. The slide in spending, drilling and ultimately in output could deepen as capex cuts grow more pronounced.
“There is no sugar-coating it, U.S. oilfield activity will collapse with oil prices well below $30 WTI,” Raymond James said.
The initial round of cuts put spending at about 45 percent below 2019 levels, the bank said. “However, the declines will be far more dramatic than these initial cuts and we stress that these announcements skew towards larger cap, better hedged and capitalised operators.”
“Total U.S. capex is likely to fall in excess of 65 per cent with a WTI price persisting in the $20s,” the investment bank concluded.