Oil Majors Announce Deep Capex Cuts Due to Oil Price Collapse

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Published Mar 25, 2020 8:36 PM by The Maritime Executive

With oil and natural gas trading at decadal lows, energy companies large and small have slashed their exploration budgets in order to conserve cash for the hard months ahead. Among many others, Royal Dutch Shell, Total and Chevron have all responded to ultra-low oil prices by cutting billions out of their capex budgets. 

On Monday, Shell announced that it would reduce its capex budget from $25 billion to $20 billion or less for 2020. It is also aiming to cut opex by $3-4 billion annually compared to 2019 levels and is not continuing share buybacks after the current tranche.

"As well as protecting our staff and customers in this difficult time, we are also taking immediate steps to ensure the financial strength and resilience of our business,” said Ben van Beurden, Chief Executive Officer of Royal Dutch Shell. “The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past.”

On the same day, Total announced capex cuts of more than $3 billion, bringing its investments to less than $15 billion for the year. It will also pursue $800 million in opex savings for 2020.

"This is a global economic crisis. Global oil demand is likely to fall by six million barrels per day in April due to the spread of this virus in many countries. [This is] compounded by a crisis of supply, as Saudi Arabia and its partners have decided to up production by three to four million barrels per day. So, six plus four equals an extra 10 million barrels per day on a zero-demand market, which is huge. This explains why the price of oil has collapsed, has been halved," said Patrick Pouyanné, chairman and CEO of Total. 

Chevron announced its own $4 billion cut on Tuesday, citing market conditions. “Given the decline in commodity prices, we are taking actions expected to preserve cash, support our balance sheet strength, lower short-term production, and preserve long-term value," said Chevron chairman and CEO Michael Wirth in a statement. Those cuts include $2 billion in unconventional oil projects, primarily in the Permian, and $700 million in upstream projects and exploration. Chevron is also suspending a $5 billion annual share repurchase program. Despite these changes, Chevron expects to produce an equivalent volume of oil this year.

On Wednesday morning, Norwegian state oil major Equinor announced that it was cutting its annual capex budget by about $3 billion and reducing exploration activity by about $400 million. The decision will particularly affect its U.S. onshore drilling activity. Equinor has also suspended a $5 billion share buyback plan and is pursuing $700 million in opex savings.

Occidental Petroleum, which recently acquired Anadarko, has cut its capex program down to $2.7-2.9 billion for the year - roughly half its initial budget range of $5.2-5.4 billion. It is also slashing its dividend, reducing executive salaries and pursuing about $600 million in operating cost savings. The changes will cut its oil output by about six percent for the year.

The Norwegian oil firm Aker BP announced this week that it will delay all non-sanctioned projects and implement a 20 percent cut in its 2020 capex budget. Its production forecast remains the same. 

ConocoPhillips made its move earlier, announcing last Wednesday that it would cut capex by $700 million (about 10 percent) for the year. “Our industry is clearly experiencing an unprecedented event brought about by simultaneous supply and demand shocks,” said CEO Ryan Lance. “The actions we are now taking reflect an acknowledgement of current events as well as uncertainty around the timing and path of a recovery.”