Europe's largest integrated oil companies have stepped up their efforts to cut costs as they brace for an extended period of lower oil prices.
"We are planning for a prolonged downturn," Shell chief executive Ben van Beurden says. "We cannot rely on high oil prices to come back to help us out." This marks a shift in tone since the beginning of this year, when van Beurden warned against cutting too much.
Shell, BP and Norwegian state-controlled Statoil have cut their 2015 organic capital expenditure (capex) budgets, while Total expects to spend at the lower end of its $23bn-24bn guidance. Shell now expects its capex to be about $30bn this year, $3bn lower than the figure that it gave in April and $5bn lower than last year's spending.
Deflation in supply chain costs will account for about $1.5bn of the reduction compared with last year. Shell has also put a figure on operating expenditure (opex) savings for the first time. It expects opex this year to be more than $4bn lower than in 2014, helped by about 6,500 job cuts.
"Costs are actually now back at the levels we saw four years ago," Shell chief financial officer Simon Henry says. "And costs will go down further in 2016, because we continue to work on the supply chain, on our own overheads and on targeted programmes in certain areas."
Shell is on track to complete its acquisition of UK firm BG early next year. It targets capex of $35bn for the merged firm in 2016, down from guidance of $40bn that it gave when announcing the deal in April.
Shell is not alone in revising spending plans. BP expects 2015 capex to be below previous guidance of $20bn, thanks to cost deflation and project deferrals. Deepwater rig rates have fallen by up to 30pc, chief executive Bob Dudley says. And BP does not expect cost deflation to bottom out until 2016, assuming oil prices stay at current levels.
Total expects capex to fall below $20bn/yr from 2017 and is on track to exceed its $1.2bn opex savings target this year. It has seen a significant drop in rig and seismic costs but is banking on platform construction costs falling further before moving ahead with new projects. "We are confident that if oil prices stay at this level, we will see significant cost reduction for future projects, and we are ready to wait for that," chief financial officer Patrick de la Chevardiere says.
Statoil has trimmed its 2015 organic capex budget to $17.5bn from previous guidance of $18bn, and may cut further. Capex next year will be lower than current spending, outgoing chief financial officer Torgrim Reitan says.
Statoil expects efficiencies worth $1.7bn to pre-tax cash flow from 2016. North Sea operating costs have fallen faster than expected, Reitan says. Statoil said earlier this year that it would delay final investment decisions on some projects to preserve flexibility of $5bn-7bn in spending. This decision has been vindicated because cost forecasts for the delayed projects have since fallen, Reitan says. Statoil expects further cost falls and will retain the flexibility for now.
Spain's Repsol is planning to limit its upstream investments to $4.5bn/yr in 2015-16, little changed from last year despite nearly doubling in size in terms of production after the acquisition of Canadian independent Talisman this year. The increased scale of the company could help it reduce upstream opex by $9/bl of oil equivalent (boe), it says. The company is on track to achieve a $5/boe reduction this year compared with last.
Profits under pressure
Companies are adjusting their spending plans as profits and cash flow come under increasing pressure. Second-quarter results followed the same pattern as in the first quarter, with a sharp year-on-year fall in oil prices weighing heavily on upstream profits, partly offset by lower costs. But lower crude prices supported stronger refining margins that boosted downstream profits.
BP swung to a loss after taking a $10bn pre-tax charge related to a recent agreement in the US to settle most of its remaining Macondo oil spill liabilities. And higher exploration write-offs contributed to a weaker-than-expected upstream result. Italian firm Eni's results were skewed by a heavy impairment-driven loss at engineering firm Saipem, in which it has a 43pc stake.
But Eni's struggling downstream business continued to show signs of improvement, with capacity reductions helping to lower its breakeven costs. And new projects drove an 11pc year-on-year rise in Eni's upstream production to 1.75mn boe/d, prompting the firm to lift its full-year output growth forecast to over 7pc from 5pc.
Shell bucked a trend of rising production among most of its European peers, with its quarterly output dropping below 3mn boe/d for the fourth time in five years. The company was hampered by heavy maintenance, restrictions on natural gas production in the Netherlands and the impact of last year's divestments.
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