There's a durable sense of weakness in the oil economy and, while recovery is expected, it's uncertain when, Royal Dutch Shell said Wednesday.
Shell said it expects fourth quarter profits to come in at around 50 percent lower year-on-year as the industry continues to suffer from the dramatic declines in crude oil prices. The price for Brent crude oil tumbled 2.8 percent in early Wednesday trading in a sign of protracted weakness in the energy markets.
A spokesperson for Shell said the company was positioning itself for a sustained downturn by cutting capital investments. The company is planning to merge with British counterpart BG Group and, combined, spending of $33 billion for the year marks a 45 percent reduction from its peak.
Shell said an oversupplied market is the fundamental reason behind the sector decline. Once production falters from maturing fields and investments in future output falls off, supply pressures should ease and markets will start to recover.
"Overall production capacity is estimated to be falling by about 4 million barrels a day, so the world needs an additional five million barrels a day just to stand still in terms of meeting demand," a Shell spokesperson said in response to email questions. "These fundamentals point to the oil price recovering, but when and to what level is a matter of speculation."
Provided the deal with BG Group is completed, the company said the combined footprint will be positioned well to take advantage of resilient sectors like liquefied natural gas and deep-water exploration, which will combine to act as a springboard for the combined entity.
Shell Chief Executive Officer Ben van Buerden said teaming up with BG Group would mark the start of a new chapter for the Dutch supermajor. Costs will move lower by about $4 billion for 2016, but also result in widespread redundancies.
"These actions will include a reduction of some 10,000 staff and direct contractor positions in 2015-16 across both companies, as streamlining and integration of the two companies continue," he said in a statement.
Shares in Royal Dutch Shell (NYSE:RDS) held steady, while those for BG Group (LON:BG) were off 2.4 percent in early Wednesday trading.
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