LONDON (Bloomberg) — Global crude supplies will start to dwindle in as little as two years, boosting prices, as the industry cuts investment to weather the worst market collapse in a generation, according to Statoil ASA.
Oil companies reduced capital expenditure last year and are likely to cut it further this year and next, Statoil’s CFO Hans Jakob Hegge said in an interview in London. Lower spending means there could be a “significant effect” on crude supply after 2020, he said.
“For the first time in history, we’ve seen cutting of capex two years in a row and potentially we risk a third year as well for 2017,” Hegge said. “It might be that we see quite a dramatic reduction in replacing the capacity and of course that will have an impact, eventually, on price.”
Despite signs the supply glut is easing, companies are preparing for a prolonged downturn. The industry reduced capital spending by 24% last year and is expected to cut it by another 17% to about $330 billion this year, the International Energy Agency said in February. Oil fields require constant investment to maintain production, and in 2016, for the first time in years, drillers will add less oil from new fields than they lose through natural decline in old ones, according to Oslo-based Rystad Energy AS.
Producers have seen their earnings plunge and debt pile up as Brent crude, the international benchmark, trades at half the level it was at two years ago. Even though prices have recovered more than 80% since January, the industry is cutting deeper. Royal Dutch Shell Plc, the world’s second-biggest oil company, will eliminate 2,200 more jobs this year “to ensure Shell remains competitive through the current, prolonged downturn,” V.P. for UK and Ireland Paul Goodfellow said on Wednesday.
There are more spending cuts across the industry to come, Hegge said. In boom years, when prices rose from about $25/bbl at the turn of this century to over $100 in 13 years, companies allowed costs to increase as they looked to add reserves andproduction. The current downturn is forcing them to take a long, hard look at their expenditure.
“We’re coming from a position where we built projects on a standalone basis” without building on past experience, Hegge said. “It’s very different from other industries that think of more assembly lines and more efficiency in every aspect of the process.”
Statoil, Norway’s biggest oil company, plans $13 billion in capital expenditure this year, and doesn’t plan to increase it until oil prices recover, Hegge said. Shell’s expenditure in 2016 is “trending toward” $30 billion from previous guidance of $33 billion, and BP Plc has the option to cut to as little as $15 billion in 2017 from $17 billion this year.
All of this depends on the oil price. Statoil, Shell, BP and others have said they see supply and demand rebalancing, yet they’re still girding for an extended period of low prices. Norway’s petroleum minister Tord Lien said this week that no one should count on oil returning to $100.
“It’s better to plan for $60 and let the people who want to hope for $100, hope for $100,” he said.
Two years of low prices mean producers are approving fewer new projects. From 2007 to 2013, companies took final investment decisions on 40 mid- to large-sized oil and gas projects a year on average, according to industry consultant Wood Mackenzie Ltd. That fell to below 15 in 2014 and to less than 10 last year. Morgan Stanley estimates nine projects are in contention to get the green light this year.
“There are some signs of recovery” in oil fundamentals but there’s still uncertainty out there, Hegge said. “So it would still be a tough 2016.”