Energy issues
If you just read the title to this column, I am guessing that you think I have been drinking heavily. Possibly. There is not much to be happy about, with oil and gas prices still in the toilet and likely to stay that way for some time. A friend of mine summed it up succinctly the other day, when he asked me if I knew the difference between an independent oil man and a pigeon in this environment. I didn’t. He informed me that a pigeon can still make a deposit on a Mercedes.
However, rather than stressing over the current situation, it might be better to come up with some strategies (other than drinking heavily) to lighten the mood. A few such strategies are listed below:
Watch the entire Star Wars series. What better way to take your mind off the current situation than to watch a series about well-meaning folks trying to survive in one global holocaust after another. Wait—that’s what we have been doing. Never mind.
Play the lottery. There is not much more fun that taking an outside chance that things will go your way, big time, although the odds are a million-to-one against it. Wait—that’s what we have been doing. Never mind.
Buy a Corvette. Could there be anything more enjoyable than barreling down the thoroughfare, ignoring prudence to the danger of yourself and those around you? Wait—that’s what we have been doing. Never mind.
Pass a bill ending the U.S. oil export embargo. In a clever move, enable export of American crude. To whom, you might ask. Never mind that.
The result—and I don’t have to tell you this—is a serious glut in a global oil and gas market already full to the brim. How full? The U.S. has 490 MMbbl of oil in storage, enough to keep the country running for about a month. It also has 3.8 Tcf of gas in storage, enough to warm the U.S. for 50 days, on average. On a larger scale, OECD countries (including the U.S.) have nearly 3 Bbbl of oil in storage, a two-month supply for OECD countries. And the surplus will get bigger, as the industry continues to produce 1.5 MMbopd in excess of demand. Add the potential for Iran and Libya to throw another 700,000 bopd into the market in the coming year, and the problem is magnified further.
It is obviously a serious problem. Fortunately, there are a number of steps being taken by the major oil companies to make it through the crisis—steps that I did not imagine they would take, but steps that appear to be well-thought-out and viable. These steps do not, for the most part, include cutting production immediately, other than through divestitures.
Below are some of the primary actions among majors Chevron, ConocoPhillips and Statoil, designed to ensure not only survival, but value retention in the current environment.
In a Dec. 15 investors’ presentation, Chevron CEO John Watson noted that “our goal is to balance our cash equation by completing projects under construction, and reducing capital spend and operating expenses to levels consistent with the current market conditions.” To accomplish that, the company has identified approximately $4 billion in spending reductions, with about half coming through organizational reviews and portfolio rationalization, and about half coming through the supply chain. On the organizational side, modifications are expected to result in employee reductions of 6,000 to 7,000, with a similar number of reductions in contracting staff. The company will also engage in shorter-cycle projects to give it more flexibility in setting spending budgets.
ConocoPhillips is, according to Chairman and CEO Ryan Lance, “a very different company” than it was just a couple of years ago. “We're choosing to exercise flexibility during this downturn through capex and the balance sheet if necessary, not via the dividend. We're announcing a 2016 capital budget of $7.7 billion. That's $2.5 billion lower than 2015 capital guidance, and more than $9 billion lower versus 2014.” The company plans to complete about $2.3 billion in assets sales, including transactions that have already closed in 2015 or deals with definitive agreements in place that it expected to close by year end or in the first quarter of 2016. About $600 million was completed as of the third quarter. About 45% of the proceeds were derived from nonproducing assets, such as the company’s interest in infrastructure assets in Europe and Asia, and a South Texas pipeline. The remaining 55% were derived from producing assets, primarily in North America.
Statoil has taken similar actions, following a fall in revenue, primarily as a result of low oil prices, from NOK 30.9 billion in the third quarter of 2014 to NOK 16.7 billion in the same period of 2015. President and CEO Eldar Saetre noted that “I am pleased with the way we are taking costs down, but the continued low prices in the third quarter demonstrate that we must continue to chase further cost efficiencies.” To that end, Statoil and its partners have decided, among other things, to accept a delayed timetable for the commencement of production from Aasta Hansteen and Mariner fields, moving the production start from 2017 to the second half
of 2018.
It is unclear what effect these actions might have on the companies or the oil price crisis. But it is clear that continued low prices will require further remediation efforts by these majors, and by the rest of the industry. It looks like it will be a long year. But these actions are a good start. 
