• Monday, December 11, 2023
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Cost-cutting measures hit front burner in the industry

Cost-cutting measures hit front burner in the industry

Crude oil prices have fallen by about 60 percent since June 2014 and the industry is responding as they work out the best way to operate in a tougher market environment. Oil prices have dropped from nearly $110 a barrel in June to below $50 this month as rocketing production outpaces tepid demand. Projects have been postponed or canceled across the globe.

Many oil majors are ripping their costs apart from operations, jobs and CAPEX in unprecedented numbers.  Spending on global exploration and production could fall over 30 percent this year, the greatest drop since 1986, should markets remain depressed.  Even the biggest firms are slashing spending amid the steepest oil price crash since the recession, sending ripples across the vast sector.

The cost reductions come as little surprise. After five boom years for the oil industry, a pullback is only natural when prices slide. Producers are cutting spending budgets and calling on service firms to cut prices. Service firms are simply passing that on to their suppliers of raw materials. The speed at which the cuts are happening and the depth of the cuts is an indication of the desperation in the industry.

Oil services giant Schlumberger said it will reduce spending this year by 25 percent and fire 9,000 workers worldwide about 7.1 percent of its workforce. ConocoPhillips is cutting 230 in Britain overall. Suncor Energy, Canadian’s largest oil producer, said on January 13 it would reduce its staff by 1,000 as it cut spending on new projects. Continental Resources slashed its spending for 2015 by 41 percent last month, while Range Resources Corp. reduced theirs by 33 percent. 

Qatar Petroleum and Shell have cancelled a $6.5 million project in Qatar. Work started on the $6.4bn (£4.2bn) Al Karaana project in 2012 and the plant in northern Qatar was due to come online in 2018. The partners had already awarded a number of contracts for the scheme, but have suspended all work with immediate effect. In a joint statement yesterday they said: “The decision came after a careful and thorough evaluation of commercial quotations from engineering, procurement and construction bidders, which showed high capital costs rendering it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry.”

Read also: Marginal oil fields make gains amidst falling global prices

Tullow Oil, a British oil company that drills in West Africa, has taken $2.7 billion write-off slashing exploration spending down to $200 million, about one-fifth of what it was just a year ago. Statoil has shelved exploration plans in Greenland.

BP announced that it was responding to “toughening market conditions” by cutting 300 jobs from its 3,500-strong North Sea workforce, reducing contractors pay and implementing wide-ranging cost-cutting measures with the local trade union saying that it expected many more of its members in the industry would lose their jobs. BP has around 15,000 employees in the UK, among a total of 84,000 worldwide. It said last month that the focus of any job losses would likely be on head office and back office roles, rather than front-line operations.

Tullow, with production interests in 28 countries, is also among firms expected to announce job cuts to its North Sea operations.Future exploration, investment and tens-of-thousands of jobs are all said to now be under threat at North Sea oil fields from falling global oil prices, with up to a third of the North Sea already nearing loss-making territory. There have been calls for a 50 per cent cut in North Sea taxes as 100 fields were said to be in danger of closing as the crisis deepened. Oil and Gas UK (OGUK), the voice of the offshore industry, predict that if oil prices plummet towards $40 and below, only major companies such as BP and Shell will be left producing in the North Sea at ultra-thin levels of profit.

Some of the biggest reductions in investment are coming from the US shale oil producers, the part of industry that did most to boost production and set the price crash in motion. Continental Resources, the biggest operator in the Bakken shale formation in North Dakota, slashed its 2015 spending plan by 41 per cent last month to US$2.7 billion.

As activity slows and drillers idle rigs at the fastest pace in more than 20 years, the magnitude and speed of the changes are surprising firms that provide some of the raw materials and equipment essential to drilling that even two months ago hoped to dodge the ill effects of the slowdown.