The oil industry is set to further reduce spending this year as crude prices remain low, according to the head of the International Energy Agency, signaling more pain for oil services and engineering firms.
Explorers already slashed capital investments this year by 17% from 2015 levels and are likely to deepen the cuts, Fatih Birol, executive director of the Paris-based IEA, said in an interview on the sidelines of the annual IHS CERAWeek conference in Houston. Companies may eventually top last year’s 24% chop and might further lower spending in 2017, he said.
“We are raising alarm bells about investments cuts,” Birol said. “The worst-case scenario is we see a third year of spending cuts” in 2017, he said.
The tightening hurts oil services companies including Halliburton Co., Schlumberger Ltd. and Weatherford International Plc, as well as construction and engineering firms, such as Fluor Corp., Bechtel Group Inc. and Chicago Bridge & Iron Co. Brent crude, the global oil benchmark, has fallen from an average of almost $100/bbl in 2014 to about $30/bbl so far this year.
The oil industry has idled more than 1,000 rigs and gutted more than 250,000 jobs. Oil services, drilling and supply companies are bearing the brunt of the downturn, having accounted for more than three quarters of the layoffs, according to industry consultant Graves & Co.
The Organization of Petroleum Exporting Countries started a market war against U.S. shale and other high-cost producers in November 2014 by not reducing output despite a global oversupply. Brent is down about 8% so far this year on speculation a global glut will persist amid the outlook for increased exports from Iran and brimming U.S. stockpiles.
“It’s easy for consumers to be lulled into complacency by ample stocks and low prices today,” Birol said in a speech he delivered at the conference. “But they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant future.”
The last time the industry weathered two consecutive years of spending cuts was 1986-87, when prices plunged to about $10/bbl from more than $30 after Saudi Arabia flooded the market. In a sign of the painful decisions executives are making, Royal Dutch Shell Plc last year took a $2-billion charge after abandoning construction at its Carmon Creek oil sands project in Alberta, Canada.
Exxon Mobil Corp., the world’s largest oil company by market value, earlier this year announced it was cutting its 2016 spending program by 25% to a 10-year low. Shell, Chevron Corp., Total SA and BP Plc have also announced large spending cuts.
Wood Mackenzie Ltd. estimates explorers have canceled or delayed investments worth nearly $400 billion since prices started their slide in late 2014. Offshore deepwater projects account for the majority of the spending cuts, it said January in a report. Companies are adjusting strategies to manage the risk of “sustained” low prices, said Tom Ellacott, V.P. of corporate analysis at the Edinburgh-based consultant.