Chevron and ConocoPhillips have announced their budgets for next year, each cutting spending 24-25% year-over-year amid forecasts of an ongoing decline of US oil production in 2016.
The two companies’ plans come on the heels of an increasing number of forecasts that see oil sector investment significantly declining in 2016.
Two months ago, we forecast a 20%+ drop in US oil sector investment for 2016, which at the time some thought was aggressive. But since then, others have begun to forecast significant spending declines for next year as well.
Rystad Energy reported yesterday that it sees E&P investment falling by $250 billion this year and a further $70 billion in 2016. IEA director Fatih Birol also said Wednesday that investment in the oil sector has dropped by more by 20% in 2015, and is expected to fall again next year. And this week, Barclays took it a step further as oil prices continue to fall, saying it expects a 35% capex cut in 2016 by US oil producers.
We’ll now move from these general oil sector forecasts to what these two companies plan for next year amid the low price environment:
Chevron: Working With What It Already Has
Chevron plans to spend $26.6 billion in 2016 mainly on the completion of the construction of existing projects and activities at its producing shale and tight oil assets. The major’s planned 2016 spend represents a 24% reduction from what it expects to spend in 2015.
Chevron CEO John Watson
Chevron plans to allocate the $26.6 billion as follows:
~$9 billion of planned spending is earmarked for existing base producing assets- inclusive of shale and tight resource investments.
~$11 billion will be allocated to major capital projects now underway.
~$3 billion is earmarked for projects that haven’t yet been sanctioned.
~Global exploration funding represents about $1 billion of the total.
About 80% of Chevron’s affiliate’s expenditures are related to investments by Tengizchevroil LLP in Kazakhstan and Chevron Phillips Chemical Company in the US.
The following table shows the breakdown of Chevron’s 2016 Capex budget per business segment:
Here’s what CEO John Watson said regarding Chevron’s plans next year:
“Our capital budget will enable us to complete and ramp-up projects under construction, fund high return, short-cycle investments, preserve options for viable long-cycle projects, and ensure safe, reliable operations…We gain significant flexibility in our capital program as we complete projects under construction,” Watson continued. “Given the near-term price outlook, we are exercising discretion in pacing projects that have not reached final investment decision.”
ConocoPhillips: Third Of 2016 Capex In US Lower 48
Turning the the world’s largest Independent E&P, ConocoPhillips said Thursday that it is cutting its 2016 Capex by 25% from an expected 2015 Capex of $10.2 billion. This represents a 55% reduction compared with 2014 spending.
ConocoPhillips CEO Ryan Lance
The $7.7 billion planned spend for next year includes funding for base maintenance and corporate expenditures, development drilling programs, major projects, and exploration and appraisal spending, ConocoPhillips said. Reductions compared with expected 2015 Capex of $10.2 billion come mainly from lower major project spending, deflation capture and efficiency improvements.
ConocoPhillips plans to allocate the $7.7 billion as follows (by category):
$1.2 billion (16%) to base maintenance and corporate expenditures
$3.0 billion (39%) to development drilling programs
$2.1 billion (27%) to major projects
$1.4 billion (18%) to exploration and appraisal
Divided up regionally, ConocoPhillips will allocate the highest percentage of next year’s Capex to the US Lower 48: ~$2.6 billion, or 34%. This represents a ~30% reduction compared with 2015 expected spending. The company says this is because of “improved efficiencies, lower average rig count and lower infrastructure spending in the unconventionals, and deflation.”
Here’s a further look at the regional breakdown of ConocoPhillips’ 2016 spending plans:
Spending in the US Lower 48 will focus mainly on the unconventionals where the company plans to maintain current activity levels with 13 rigs across the Eagle Ford, Bakken and Permian, with ongoing flexibility to ramp up or down activity in these plays.
Other spending will be related to exploration and appraisal activity in the Gulf of Mexico, base maintenance and its conventional drilling program.
The company plans to spend around $800 million, or ~10% of its budget in Canada (-30% from this year), to complete its Surmont 2 oil sands project, as well to drill exploration wells off Nova Scotia.
An additional 52% of its 2016 Capex will be allocated to Alaska, Europe, Asia Pacific and the Middle East, where the company’s projects include the startup of APLNG in Australia.
ConocoPhillips also said it’s reducing its operating costs by $7.7 billion from $10.5 billion in 2015. “Reductions are primarily the result of sustainable internal cost reduction efforts, efficiency gains, deflation capture and market impacts, partially offset by increased costs associated with higher production.”
Here’s what CEO Ryan Lance said regarding ConocoPhillips plans next year:
“We’re setting an operating plan for 2016 that recognizes the current environment, which remains challenging. We are significantly reducing capital and operating costs, while maintaining our commitment to safety and asset integrity. We also retain the flexibility to adjust capital spending in response to market factors…
“Our plan highlights the actions we accelerated over the past year to position our company for low and volatile prices. As we enter 2016, ConocoPhillips has greater capital flexibility, a more competitive cost structure, a streamlined portfolio and the ability to deliver profitable growth from a high-quality resource base. These advantages, coupled with our strong balance sheet, give us the ability to maintain a compelling dividend and close the gap on cash flow neutrality across a range of prices.”