Oil ma­jors' $60b cuts don't go far enough as crude slides


The $60 bil­lion of oil-in­dus­try spend­ing cuts this year won't be enough as crude lan­guishes near a six-year low.

The world's big­gest pro­duc­ers will need to trim in­vest­ments by a fur­ther $26 bil­lion to meet sacro­sanct div­i­dend pay­ments, ac­cord­ing to Jef­feries Group LLC. Cap­i­tal spend­ing will have to fall 10 per­cent next year, Banco San­tander SA says.

Oil com­pa­nies are brac­ing for "lower for longer" prices as a global sup­ply glut per­sists, drag­ging crude to the low­est close since March 2009 in New York on Tues­day. Royal Dutch Shell Plc, which has re­duced spend­ing 20 per­cent this year, has "more levers to pull" should the mar­ket weaken fur­ther, ac­cord­ing to Chief Ex­ec­u­tive Of­fi­cer Ben Van Beur­den.

The tight­en­ing means in­ter­na­tional pro­duc­ers such as Shell and Chevron Corp. can break even at a lower crude price -- about $10 lower than be­fore they started cuts last year, ac­cord­ing to Jef­feries an­a­lyst Jason Gam­mel.

Still, they'll need Brent at $82 a bar­rel next year to bal­ance cash flow from oper­a­tions with in­vest­ments, he said. San­tander's Jason Ken­ney puts the breakeven level at $70, about $20 above cur­rent prices. That gap is re­flected in energy stocks, which are among the world's worst per­form­ers this year.

Some oil ma­jors have mit­i­gated the im­pact of crude's slump by bol­ster­ing the share of nat­u­ral gas in their out­put. Shell and To­tal SA now pro­duce more gas than oil and are the least ex­posed to lower prices, while Chevron is most at risk.

Each $1 change in the price of Brent af­fects Shell's pre­tax profit by about $330 mil­lion, while for BP the im­pact is $300 mil­lion, ac­cord­ing to data from the com­pa­nies. Chevron's cash flow would be hit by as much as $350 mil­lion. Of the three, BP pumps the most crude. The in­dus­try's $60 bil­lion in pro­jected cuts com­bines cap­i­tal and op­er­at­ing ex­pen­di­ture in 2015, ac­cord­ing to Jef­feries.

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