Shell, Chevron, others to cut investments by $73bn in 2016

Global oil and gas investments of Shell, Chevron and other majors are expected to fall further to their lowest in six years in 2016 with a cut of about $73 billion, New Telegraph has gathered. According to Oslo-based consultancy, Rystad Energy, the investments are projected to dip to $522 billion, following a 22 per cent fall to $595 billion in 2015. With crude prices at 11-year lows, the world’s biggest international oil companies (IOCs) producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors. A report by the Oslo-based firm sited by New Telegraph revealed that at around $37 a barrel, crude prices were well below the $60.

It noted that firms such as Total, Statoil and BP need to balance their books, a level that had already been sharply reduced over the past 18 months. It said: “International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery. “US producers, Chevron and ConocoPhillips, have published plans to slash their 2016 budgets by a quarter.

Royal Dutch Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead. “Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22 per cent fall to $595 billion in 2015. Also, Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy added that this would be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments.

He noted that activities that survive would be those that offer the best returns. But with the sector’s debt to equity ratio at a relatively low level of around 20 per cent or below, industry sources say companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts. Shell has not cut its dividend since 1945, a tradition its present management is not keen to break. The rest of the sector is also averse to reducing payouts to shareholders, which include the world’s biggest investment and pension funds, for fear investors might take flight.

Exxon Mobil and Chevron benefit from the lowest debt ratios among the oil majors while Statoil and Repsol have the highest debt burden, according to Jefferies analyst, Jason Gammel. With only a handful of major projects approved in 2015, including 

Shell’s Appomattox development in the Gulf of Mexico and Statoil’s giant $29 billion Johan Sverdrup field in the North Sea, 2016 is also likely to see a few large investment decisions. Projects that could be green-lit include BP’s Mad Dog Phase 2 in the Gulf of Mexico, which the company now expects to cost less than $10 billion, around half the original estimate, and Chevron’s expansion of the Tengiz project in Kazakhstan, according to Gammel.

Industry-wide, costs will be cut by reducing the size of projects, renegotiating supply contracts and using less complex technology. After rapidly expanding in the first half of the decade when oil prices were above $100 a barrel, companies are now expected to focus on the most profitable activities, said Brendan Warn, oil and gas equity analyst at BMO Capital Markets. “Companies want to reduce their range of activity and pick those with the highest returns on capital,” Warn said.