Crude reality: price crash means oil firms must slash spending

Published March 22, 2020, 1:55 PMBy Agence France-Presse
https://business.mb.com.ph/2020/03/22/crude-reality-price-crash-means-oil-firms-must-slash-spending/

Confronted with a dizzying drop in prices, oil firms face a real challenge as they try to cut investment spending in order to survive a coronavirus-induced collapse in demand coupled with a Russia-Saudi Arabia price war.

Investment in oil exploration and production was set to hit just over half a trillion dollars this year according to the French research body IFPEN, as firms sought to maintain and expand output.

But the emergence of the coronavirus, which has seen nations across the world confine citizens at home and shutter businesses to slow its spread, has upended all forecasts.

The International Energy Agency, which advises oil-importing nations on energy policy, now expects the first annual drop in oil demand since 2009 during the global financial crisis, as the global economy tips into recession.

The main international benchmark, Brent crude, has fallen from just shy of $60 per barrel to under $25 this week, before regaining some lost ground.

The main US benchmark, WTI, tumbled from nearly $54 to just over $20.

Not all of the drop is due to the coronavirus.

The price of oil had been supported for the past couple of years by production limits agreed by the OPEC oil cartel led by Saudi Arabia and a number of other producers including Russia.

However Russia and Saudi Arabia failed to agree earlier this month on deeper cuts to take account of falling demand due to the coronavirus pandemic.

Saudi Arabia subsequently slashed prices and announced it would boost output and Russia followed suit, leading to the vertiginous drop in prices.



Cut and shift

“All companies in the sector will be seeing what more they can do to cut costs, shift their activities to the lowest cost fields they can, trim investment and think hard about what dividend they can pay,” said Professor David Elmes at Warwick Business School.

While reducing investment is relatively easy in the near term, the longer prices remain low the more firms will need to look at shutting down production that is more expensive, such as offshore.

“For the majors, the prospect of $30 per barrel of oil or below for a period of time is an extreme challenge,” said Biraj Borkhataria, an analyst at RBC Capital Markets.

He said that if these prices persist more than six months, then oil majors would need to cut into the generous dividends they pay — which is why they are prized by many investors — and that prospect has already been partly incorporated into their share prices.