| Big oil to cut investment again in 2016 |
WITH crude prices at 11-year lows, the world's biggest oil and gas producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors.
AT around $US37 ($A50.75) a barrel, crude prices are well below the $US60 firms such as Total, Statoil and BP need to balance their books, a level that has already been sharply reduced over the past 18 months.
International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery.
US producers Chevron and ConocoPhillips have published plans to slash their 2016 budgets by a quarter.
Royal Dutch Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead.
Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22 per cent fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy.
"This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments," Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy, told Reuters.
The activities that survive will be those that offer the best returns.
But with the sector's debt to equity ratio at a relatively low level of around 20 per cent or below, industry sources say companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts.
Shell has not cut its dividend since 1945, a tradition its present management is not keen to break.
The rest of the sector is also averse to reducing payouts to shareholders, which include the world's biggest investment and pension funds, for fear investors might take flight.
Exxon Mobil and Chevron benefit from the lowest debt ratios among the oil majors while Statoil and Repsol have the highest debt burden, according to Jefferies analyst Jason Gammel.
But with fewer projects approved, fewer fields developed and less maintenance work undertaken, companies are putting their growth at risk.
"You've got to hold your nerve. If you cut too deeply, it is very, very difficult to take advantage of the price rebound when it comes," a senior official at a European oil major told Reuters.
Tumbling oil prices have cut billions of dollars from oil companies' revenue streams, although strong profits from refining have softened the blow for most.
And while their in-house oil and gas production growth comes under pressure, companies might opt to acquire rivals with less resilient balance sheets, as with Shell's proposed acquisition of BG.
"In the second half of 2016, if we see price stabilisation, I expect companies will be looking to replace reserves inorganically, by making acquisitions," Warn said.
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