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Oil prices drop faster than companies can cut costs

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Bloomberg News: SATURDAY, APRIL 23, 2016

The world’s biggest oil companies, set to report their worst quarterly earnings in more than a decade, are finding that their cost-cutting efforts haven’t matched the decline in crude prices over the past two years.

While producers have been deferring projects, eliminating jobs and freezing salaries, the process will take three years to complete, according to Barclays oil sector analyst Lydia Rainforth. In the meantime, profits are being hammered.

“A lot of work still needs to be done on costs,” she said. “It’s a reflection of how much costs had piled up and how long a process this is.”

For producers from Royal Dutch Shell to Chevron, reeling under the threat of credit-rating downgrades, slashing costs is the surest way of protecting balance sheets. Still, reversing course is proving painful after $100 oil persuaded companies to pump money into expensive areas in search of new deposits, hire more people and rent rigs and services at record rates. Productivity suffered.

Shell, Europe’s biggest oil company, had operating costs of $14.70 a barrel last year when Brent crude averaged $53.60, Barclays said last month. That’s more than double the $6-a-barrel cost in 2005, the last time oil averaged in the $50s, according to the report.

BP’s operating expense was $10.40 last year, compared with $3.60 in 2005, according to Barclays. The operating costs don’t include capital spending, taxes and royalties paid by producers.

After rising every year from 2010 to 2014, Shell’s costs fell 15 percent last year, according to Barclays. BP’s dropped 19 percent.

That’s not been enough to counter the rout in oil prices.

BP, when it reports first-quarter results Tuesday, is expected to post an adjusted loss for the first time since the Gulf of Mexico oil spill in 2010, according to analyst estimates compiled by Bloomberg.

Shell, reporting on May 4, is likely to post its weakest adjusted profit in more than a decade.

Exxon Mobil Corp., the world’s biggest oil company, will report the lowest quarterly profit in more than two decades on Friday, according to analysts estimates.

Chevron is estimated to report a second consecutive loss the same day.

Total SA’s first-quarter adjusted net income is predicted to be the lowest since 2001.

The size of the task facing oil CEOs can be seen at BP: Although the British producer was one of the first to prepare for the downturn, it still took BP most of 2014 and 2015 to identify where costs could be cut, and full implementation took place only this year, Rainforth said.

BP said in February that it had reduced annual cash costs by $3.4 billion compared with 2014 and expected them to be about $7 billion lower in 2017. A BP spokesman declined to comment further.

Shell plans to reduce operating expenditure by $3 billion in 2016 after cutting it by $4 billion last year. The company declined to comment beyond reiterating that it has options to further reduce spending.

Exxon and Chevron declined to comment.

Total is targeting spending on operating its exploration and production business of $6.50 a barrel of oil equivalent this year, after cutting that to $7.40 last year from $9.90 in 2014, according to a company presentation in February.

Total CEO Patrick Pouyanne said recently that cutting costs would allow the firm to fully fund its dividend from cash flow at an oil price of $60 a barrel.

Companies are doing whatever it takes. Total is reducing the speed of its service boats in Angola to save gasoline, renegotiating maintenance contracts in Congo, using fewer transportation vessels in Brunei and avoiding a storage tank in Indonesia to save the French company about $5 million, Chief Financial Officer Patrick de la Chevardiere told analysts in July last year.

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