Oil companies cut spending as oil prices slump

Abu Dhabi: Oil companies are slashing spending as oil prices slump due to over production and weak demand, analysts said reacting to the announcement made by Abu Dhabi National Oil Company (Adnoc) that it is trying to cut operational costs by up to 25 per cent.

“Job losses and capex [capital expenditure] cuts have been the standard and often necessary from global oil and gas companies during the past year. Previous investment plans did not take a plunging oil price of this magnitude into account and cost had to be cut,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, told Gulf News.

Adnoc on Wednesday announced that it is trying to reduce operational costs by up to 25 per cent but would not compromise on safety and maintenance of fields.

“From Adnoc’s point of view, we are trying to bring down our operational expenditure in the range of 25 per cent,” said Ali Khalifa Al Shamsi, Director of Strategy and Coordination at Adnoc. He however did not give details whether reduction in expenditure will have any impact on jobs.

Chevron Corp last week announced that it is planning to cut 6,000 to 7,000 jobs amid a gloomy outlook for oil prices. The spending in 2016 will be 25 per cent less than this year, according to the company.

Francisco Quintana, Head of Economic Research at Asiya Investments, said all big oil firms have seen declines in earnings in the third quarter of the year and they need to find cash somewhere to pay dividends.

“In the large state-owned oil firms of the Gulf, the situation is less dire, because they do not have the short term pressure of shareholders. This move by Adnoc is an acknowledgement of how seriously they are getting hit by low prices, but it also shows a degree of responsiveness that other state oil firms have failed to show.”

The near-term outlook does not provide much of an improvement with global oil prices expected to remain low during the coming months.

The biggest challenge in terms of balancing supply and demand thereby ensuring higher prices lies within Opec (Organisation of Petroleum Exporting Countries) itself, Hansen said.

“Rising production from Saudi Arabia and Iraq so far this year will be joined by Iran next year and this will further delay a price recovery. Oil companies seeking to hedge future production will have to look all the way out to April 2018 in order to achieve a price of $60 or higher,” Hansen said.

Oil prices plunged by more than 50 per cent in the last one year as oil production increases globally. Brent, the benchmark crude was trading at $48.79 per barrel on Thursday at 3:30 PM UAE time.

Opec refused to cut production to prop up prices in their last meeting in Vienna in June. They are due to meet next month to take stock of the situation and decide their future strategy.