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Analysis – Majors tighten capital discipline

10 May 2013, 6.58 pm GMT

Analysis – Majors tighten capital discipline

London, 10 May (Argus) — The majors are putting their capital-intensive upstream investment plans under increased scrutiny as falling oil prices and rising costs constrain their free cash flow.

BP and Chevron are reviewing their 130,000 b/d Mad Dog phase 2 project in the US Gulf of Mexico after market conditions and cost inflation made the original development plan less attractive. “This decision is in keeping with our commitment to shareholders to maintain capital discipline and ensure we only develop projects which meet suitably competitive benchmarks,” BP chief executive Bob Dudley says. “Restructuring that project and looking at it differently is absolutely the right thing to do.”

Cost pressures have forced Shell and BP to scrap plans to build onshore processing facilities for the 12mn t/yr Browse LNG project in Australia. “We are now looking at the potential for a floating solution for what is actually a great resource,” Shell chief financial officer Simon Henry says. “There is a great potential development there. We just have to find an engineering technical solution that will make it economic.”

Disappointing drilling results have prompted Shell and ExxonMobil to reassess development plans for the 35,000 b/d of oil equivalent Fram field in the UK North Sea just a few months after making a final investment decision on the project. Shell says the field remains commercially attractive but a stand-alone development may no longer be viable.

Total is pulling out of the 200,000 b/d Voyageur oil sands upgrading plant in Alberta. Rising tight light crude output from the US has challenged the project economics of Canadian upgrading plants. Total's decision to sell its 49pc stake in the Voyageur oil sands joint venture took $1.65bn out of its first-quarter profit, but it could reduce the firm's capital expenditure (capex) by more than $5bn over the next five years. Total's organic capex budget is 17pc higher this year than in 2012 at $28bn. But “our capex programme is not going to keep this pace forever”, chief financial officer Patrick de la Chevardiere says.

Project reviews and cancellations could help the majors stay within their stated capex budgets (see table). But with spending forecast to reach record levels this year and combined operating cash flow for the group down by 23pc on the year at just under $40bn in the first quarter, they may need to consider other measures to rein in their outgoings while satisfying shareholders' demand for rising dividends.

Share buy-backs — currently undertaken by ExxonMobil, Chevron and Shell — are the most flexible element of cash allocation that can be trimmed if cash flow tightens. ExxonMobil expects to reduce the amount it spends buying back its own shares by $1bn to $4bn this quarter, the lowest level since the third quarter of 2010.

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Majors’ organic capex ($bn)

 

2013*

2012†

ExxonMobil

38

37

Chevron

37

34

Shell

34

32

BP

24-25

23

Total

28

24

*planned †actual

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