Shell Not Sure When Recovery Will Emerge


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.



CNOOC Trims Global Production Target


China National Offshore Oil Corp., the country's largest producer, said its 2016 production forecast is lower than last year by about 3.5 percent.

CNOOC set a production target for the year in the range of 470 million to 485 million barrels of oil equivalent.

"The net production targets set for 2017 and 2018 are around 484 and 502 million boe respectively," the company said. "The estimated net production for 2015 was approximately 495 million boe."

The decline comes as the slowing in the Chinese economy is putting downward pressure on crude oil prices. The Chinese National Bureau of Statistics reported the economy in 2015 grew 6.9 percent year-on-year for its slowest rate in a quarter of a century.

Wang Baoan, the head of the NBS, was quoted by China's official Xinhua News Agency as saying the country has the "daunting task" of enacting deep reforms to slow the pace of economic decline.

CNOOC said that, in light of the economic pressures, it would put cost control and efficiency at the forefront of its agenda for 2016.

"In response to the continued challenge posed by low oil prices, we will maintain prudent financial policy and further strengthen cost-control measures in order to make steady progress in the overall business, including exploration, development and production," Chief Financial Officer Zhong Hua said in a statement.

CNOOC said spending for 2016 would be "no more than $9.1 billion." That's down nearly 11 percent from last year.


Weak Oil Economy Leaves Energy Companies With Less Capital To Invest


Nearly 3 million barrels of oil developments may see production delays given the capital pressure from lower crude oil prices,Wood Mackenzie finds.

"The impact of lower oil prices on company plans has been brutal," Angus Rodger, Wood Mackenzie's principle researcher in exploration and production, said in a statement.

The price for Brent crude oil, the global benchmark, is down roughly 70 percent from the most recent high in June 2014 and off 16 percent from the start of 2016. That leaves energy companies with less capital to invest in exploration and production, or the upstream part of the energy sector.

U.S. supermajor Chevron in its latest budget forecast said it plans to spend about $26.6 billion this year, about a quarter less than total expected investments for 2015. The overall budget for ConocoPhillips of $7.7 billion is a 25 percent reduction in expected full-year capital spending for 2015

Wood Mackenzie found about $170 billion in spending through 2020 has been delayed from 68 projects pulled off the table. By 2021, that means a deferred volume of around 1.5 million barrels per day and 2.9 million bpd by 2025. Those delays mean companies aren't expected to produce new oil from new projects until at least the middle of the next decade.

"But against a backdrop of overwhelming corporate pressure to free-up capital and reduce future spend -- to the detriment of production growth -- there is considerable scope for this wall of output to get pushed back further if prices do not recover and/or costs do not fall enough," he said.

Crude oil prices are lower in part because robust production levels are pushing markets toward the supply side as the global economy struggles to show growth. A balance between supply and demand should develop by the end of this year, though a recent report from the U.S. Energy Information Administration said Brent will only reach $50 per barrel by 2017.

"Tumbling prices and reduced budgets have forced companies to review and delay final investment decisions on planned projects, to re-consider the most cost-effective path to commerciality and free-up the capital just to survive at low prices," Rodgers said.

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