When times are hard, tough decisions on cuts are made. But deciding when to stop cutting can be even harder. Whether disguised as “capex flexibility,” “capex discipline” or “adjusted development pipelines,” they all boil down to the same thing—cuts, delays and deferrals.
Sifting through the latest financial results, the “dripdown effect” of these actions is clear. Any decision made by a major player to trim its sails via the usual methods like cutting capex and opex, reducing workforces, freezing recruitment, using fewer rigs or delaying completions and renegotiating cheaper rates on everything from a sixth-generation ultradeepwater drillship to the number of available coffees for selection in the canteen (I kid you not) has an effect down the line.
I counted a dozen oil contractors using the same line as many majors and independents: “Negotiating with vendors and suppliers to lower costs.”
Passing on the pain is an instinctive consequence of cuts made at the top of the food chain. What is not so instinctive is stopping before the damage is permanent.
Purely as an example here, Total outlined a $4 billion saving from cost reduction initiatives. These included a 10% capex reduction to between $23 billion and $24 billion and a 50% increase in opex savings to $1.2 billion.
Along with other measures, it is forecasting its corporate breakeven figure will drop by $40/bbl, a dramatic financial improvement.
Galp, the Portuguese national oil company, is another example. In a hint at what may still be to come after having confirmed a 20% cut in capex over 2015-19, it added that 40% of its remaining E&P capex for that period “is still to be committed”—so prepare for more deferrals.
These are just two examples—I could have highlighted many others. But such cuts come with baggage when they slice so deeply into crucial segments like greenfield investment and marginal brownfield spending.
It is often the high-tech, high-return but front-end-investment-heavy projects that enable successful operators like Total to maintain their leading positions.
Galp specifically highlighted the benefits of great work being done on its Brazilian Lula-Iracema project. Thanks to 4-D seismic, infill drilling, water-alternating-gas injection advances, subsea separation and “general technology development,” it expects to raise the field’s recovery factor from 28% to 40%. Each percentage point is worth an incremental 200 MMbbl gross, it stated.
Such benefits stem entirely from advances in technology solutions, all of which need investment. And that can only start from the top.
No one can argue with oil company logic. They must survive, as do all the companies that work for them, in an industry accustomed to cyclical volatility.
But with forecasts stating 50 MMbbl/d of new production is needed by 2030 driven by declining field rates and demand growth, this industry needs new solutions, continuous innovation and major investment.
Cut too deep for too long, and the solutions may not be there when they’re really needed.
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