The oil price slump is likely to last for several years and companies will need to adjust to this “new reality” by making enormous cuts to their capital spending, BP chief executive Bob Dudley warned yesterday, as he announced plans to chop $6bn (£4bn) off the group’s capital spending this year.
This cut means major oil companies have collectively pledged to slash more than $46bn from their planned capital spending budgets.
The group acknowledged yesterday that it had been sent reeling by falling oil prices, which have tumbled by more than 50 per cent since the summer as US shale production has pushed up supply.
BP reported a $969m loss for the fourth quarter after taking a $3.6bn charge, mostly to “reflect the impact of the lower oil price environment”.
BG Group, the production arm of the former British Gas Plc, also announced a huge hit from the oil price yesterday, reporting a $7.9bn loss for the fourth quarter on the back of an $8.9bn writedown and cutting its capital spending by up to $3bn.
Shell, Chevron, ConocoPhillips, Russia’s Gazprom and China’s Cnooc have also announced cuts.
Mr Dudley indicated there would be many more such cuts to come: “I do think we are in for a minimum of a year, probably several years, of low prices. I feel absolutely that we are in a new price environment … $45, $55 or $60 [a barrel], but a long way from $100,” Mr Dudley warned, in the strongest prediction to be made so far about the depth and duration of the slump.
The low price is likely to persist for so long because even when production does begin to fall, excess inventory is being built up so rapidly that it will take a long time to run it down again, he said.
Brent crude, which fetched $115 a barrel in June, rose $3.16 to $57.91 yesterday, as investors responded to a series of recent pledges among the major oil companies to cut capital spending – a move which will eventually reduce oil supplies.
BP’s planned $10bn “Mad Dog 2” development in the Gulf of Mexico, which was to be a massive extension of its existing Mad Dog project, was the biggest casualty of its spending cuts. The group classes this as a “mega project” and it had been set to become BP’s biggest new oil development in the Gulf for a decade.
But the group pledged to look after its investors, saying that the dividend was its “first priority”.
“One point is completely clear – throughout all this we will continue to grow value for shareholders,” Mr Dudley said.
BP also pledged to stick with Rosneft, the Russian oil company in which it owns a near 20 per cent stake and which contributed just $470m to the FTSE 100 group’s bottom line. The group said it would roughly halve exploration spending and mothball some projects in its downstream operations, such as refineries, to ensure it hits its reduced investment target of $24-$26bn.
BP will continue to make its divestments, of which it has agreed $4.7bn since 2013, with the total expected to double to $10bn by the end of 2015.
The group, which has announced hundreds of job losses last year, including 300 among North Sea staff and contractors, took a $433m charge relating to the restructuring of its operation in Aberdeen and elsewhere.
Mr Dudley said the North Sea would remain an extremely difficult region to make money in, but refused to be drawn on further redundancies.
Bioethanol: Another casualty
Associated British Foods is writing down the value of its investment in Vivergo Fuels by £98m, due to falling crude oil and bioethanol prices. Vivergo owns and operates one of Europe’s largest bioethanol plants, producing plant-derived motor fuel.
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