Investment is being slashed by tens of billions of dollars across the oil&gas sector, largely as a result of the precipitous drop in prices since July, 2008. Global upstream budgets are falling for the first time in 10 years, according to the International Energy Agency.
Excluding acquisitions, it estimates that budgeted spending on exploration and production in aggregate worldwide for 2009 currently totals about $375billion, down about $100 billion, or 21%, on 2008.
The collapse in prices, which has so far outpaced that in costs, has starved companies of cash flow that could be used to finance capital spending. It has also led many companies to assume lower future prices and, therefore, projected cash flows, so undermining the profitability of new projects, many of which are being delayed or cancelled.
Even some national oil companies’ (NOCs) investment programmes are set to be cut because dwindling revenues are needed to cover spending in other sectors.
Total oil&gas investment across the industry is expected to drop sharply during the current year, but the IEA says the pattern of spending cuts is by no means even. However, the smaller the company, the bigger the cutback assumed.
The IEA has surveyed the capital spending plans of 50 leading oil&gas companies, many of them international oil companies (IOCs). The results point to a drop of 14% in investment compared with 2008, from $513billion to $442billion.
But, collectively, the super-majors plan to cut spending by only about 5%. A few, notably Mexico’s Pemex, Brazil’s Petrobras and China’s CNOOC, have announced increases in spending.
But most other companies are cutting spending, in some cases drastically, says the IEA in a new report on the impact of recession on the global energy industry.
“The spending by the top 25 companies is set to fall by 12%, while the next 25 are planning to cut by almost 20%,” says the report.
“Spending cuts are even bigger when compared to the level of spending planned in mid-2008 for 2009, according to the results of a survey published in World Energy Outlook 2008. On this basis, the real planned spending reductions by the 50 leading companies are 15.4%.”
The IEA confirmed that smaller players – they are not covered by the survey – are being hit harder by the credit crunch than their larger brethren because they tend to have higher debt-to-equity ratios and smaller cash reserves.
“As a result, the magnitude of the overall reduction in oil&gas investment worldwide is certainly even bigger than that of the leading companies. The actual reductions in investment may turn out to be even larger than current plans suggest. Some companies have not yet announced their revised plans for 2009 and others that have are likely to announce further cuts later in the year unless oil prices pick up.”
Planned projects, especially those in the early stages of design, are most heavily affected by spending cuts. Most projects not yet under construction have already been pushed back – in some cases indefinitely – or cancelled outright. The IEA points out that paralysis in financial markets is impacting oil&gas companies’ capital spending to varying degrees. Relative to other energy subsets, the petroleum industry is characterised by a high level of self-financing (out of cash flow) and low debt-equity ratios.
IOCs, which currently account for about half of global oil&gas investment, are generally the least affected among energy companies by the difficulties faced in raising capital. They typically finance the bulk of their capital needs from internal cash flows and have less need to borrow either short or long-term. Their balance sheets are generally sound, so they still have little trouble in raising additional funds from financial markets. But the IEA warns that, nonetheless, most of the largest oil companies early this year were unable to cover their capital spending programmes out of cash flow and have been forced to borrow as a result of the recent sharp drop in prices.
“Most of the largest companies are expected to respond to lower cash flow this year by scaling back share buy-backs rather than by cutting capital spending or dividends, though some may need to increase borrowing,” says the report.
“The super-majors have been returning large amounts of cash to shareholders in the form of dividends and share buy-backs in recent years while continuing to increase capital spending. Wholly state-owned national companies, which account for a growing share of global crude oil production, are largely immune from tighter lending standards because of credit guarantees and favourable borrowing terms from their state owners.”
Recommended for you
