Home' Trinidad and Tobago Guardian : January 7th 2016 Contents BG8 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 7 • 2016
With crude prices at
11-year lows, the
world s biggest oil
and gas producers
are facing their
longest period of
investment cuts in decades, but are expected
to borrow more to preserve the dividends
demanded by investors.
At around US$37 a barrel, crude prices
are well below the US$60 firms such as Total
Statoil and BP need to balance their books,
a level that has already been sharply reduced
over the past 18 months.
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 US$5 billion in
spending cuts if its planned takeover of BG
Group goes ahead.
Global oil and gas investments are expect-
ed to fall to their lowest in six years in 2016
to US$522 billion, following a 22 per cent
fall to US$595 billion in 2015, according to
the Oslo-based consultancy Rystad Ener-
"This will be the first time since the 1986
oil price downturn that we see two con-
secutive years of a decline in investments,"
Bjoernar Tonhaugen, vice president of oil
and gas markets at Rystad Energy, told
The activities that survive will 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 com-
panies 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
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
Few large decisions
With only a handful of major projects
approved in 2015, including Shell s Appo-
mattox development in the Gulf of Mexico
and Statoil s giant US$29 billion Johan Sver-
drup field in the North Sea, 2016 is also
likely to see 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 US$10 billion, around half the
original estimate, and Chevron s expansion
of the Tengiz project in Kazakhstan, accord-
ing to Gammel.
Industry-wide, costs will be cut by reduc-
ing the size of projects, renegotiating supply
contracts and using less complex technol-
After rapidly expanding in the first half
of the decade when oil prices were above
US$100 a barrel, companies are now expect-
ed to focus on the most profitable activities,
said Brendan Warn, oil and gas equity ana-
lyst at BMO Capital Markets.
"Companies want to reduce their range
of activity and pick those with the highest
returns on capital," Warn said.
Shell, which plans to complete its US$54
billion acquisition of BG in February, intends
to focus on the attractive liquefied natural
gas (LNG) market and on deep water oil
production, especially in Brazil, both areas
in which BG is a leader.
With similar priorities in mind, BP is
increasingly focused on the Gulf of Mexico
and Egypt, where it approved a US$12 billion
development in 2015.
While tens of thousands of jobs have
already been cut in 2015, more redundancies
are expected this year as companies narrow
their focus, Warn added.
On top of reducing spending by scrapping
and delaying projects, oil majors will see
costs come down as contractors agree to
further price reductions. For example, the
annual cost of hiring a drilling ship fell to
an average of US$332,000 in 2015, compared
with $405,000 in 2014, according to Rig-
zone, which collects industry data.
The drop in investment bodes badly for
services and contractor companies, which
are seeing their work dry up.
Hold your nerve
But with fewer projects approved, fewer
fields developed and less maintenance work
undertaken, companies are putting their
growth at risk.
"You ve got to hold your nerve. If you cut
too deeply, it is very, very difficult to take
advantage of the price rebound when it
comes," a senior official at a European oil
major told Reuters.
Tumbling oil prices have cut billions of
dollars from oil companies revenue streams,
although strong profits from refining have
softened the blow for most.
And while their in-house oil and gas pro-
duction growth comes under pressure, com-
panies might opt to acquire rivals with less
resilient balance sheets, as with Shell s pro-
posed acquisition of BG.
"In the second half of 2016, if we see price
stabilisation, I expect companies will be
looking to replace reserves inorganically, by
making acquisitions," Warn said.Bloomberg
The Norwegian government has asked oil and gas
firm Statoil to conduct new studies on carbon storage
on the Norwegian continental shelf, the firm said
Some 195 nations agreed last month in Paris to
limit rising temperatures. Carbon capture and storage
(CCS), which captures carbon dioxide and stores it
underground so it won t slip into the atmosphere,
is seen as an important tool to achieve that.
The Norwegian oil major, which is involved in
four large-scale CCS projects, was the only tender
for the contract, worth 35 million Norwegian crowns
"We re moving from pure research and develop-
ment, out-of-the-lab and into the physical deploy-
ment of this, we re excited about that," Stephen
Bull, senior vice president of wind power and CCS
for Statoil said.
The feasibility studies will be carried out at three
locations in the Norwegian sector of the North Sea
and the work will be completed by June 1, Statoil
said in a statement.
"The results from the storage studies, together
with feasibility studies within CO2 capture and CO2
transport, will form the basis for a decision by the
Norwegian government on further progress for full-
scale CCS in Norway," Statoil said.
Norway has previously said it has an ambition to
realize at least one full-scale CCS demonstration
project by 2020.
The International Energy Agency has said that
by 2040, four billion tonnes of carbon dioxide emis-
sions must be captured to keep global warming at
bay, which is 100 times more than the total CCS
projects expected to be online in the next 18 months.
CCS technology is still small scale and very costly.
There are 15 projects in operation worldwide and
seven due to become operational in 2016 and 2017
according to the Global CSS Institute.
Oman s government has released a five-year plan
to halve the economy s dependence on the oil industry
as low crude prices pressure government finances.
The 2016-2020 plan, set out in a statement by
the Supreme Council for Planning late on Saturday,
said over 500 programmes and policies would seek
to diversify the Omani economy into sectors such
as manufacturing, mining, transport and tourism.
The plan aims to cut the oil industry s contribution
to gross domestic product to 22 per cent from 44
per cent; the contribution of natural gas would drop
to 2.4 per cent from 3.6 per cent.
Average annual investments would total around
28 percent of gross domestic product; cumulative
investment over the five years is expected to be 41
billion rials (US$106 billion), against 38 billion rials
envisaged in the previous five-year plan.
The new plan is to make heavy use of public-
private partnerships, with 52 per cent of total invest-
ment to come from the private sector against 42 per
cent in the last plan.
The plan assumes an average oil price of US$45
a barrel for 2016, US$55 for 2017 and 2018, and
US$60 for 2019 and 2020, while Oman s average oil
production is assumed to remain flat at 990,000
barrels per day. Brent crude oil is currently just above
The figures assume that Oman will continue run-
ning a state budget deficit throughout the plan. Last
week, the government announced plans to cut its
deficit to 3.3 billion rials this year from an actual
4.5 billion rials last year, partly through big spending
Big oil firms to cut
Oman sets plan to halve
oil's role in economy
Statoil to conduct
in North Sea fields
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