To cope with low energy prices, Royal Dutch Shell said it will cut jobs and capital spending, and Chevron Corp. said it will stop natural-gas drilling operations in North America, according to an Associated Press report. Chevron and Total SA, meanwhile, reported that profits had tumbled by more than 50%, though neither said they would cut capital expenditures.
The decision [image-nocss] to cut spending, or even consider it, several months ago would certainly have raised concerns about a price spike should the global economy rebound. In the current environment, cutting capital spending may be inevitable.
"We simply don't know when the global economy will recover, and we have to plan on the basis that this downturn could last quite some time," Shell CEO Peter Voser said this past week.
When energy prices hit record highs right around this time last year, the ability to produce more oil was under strain and any potential disruption of supply sent prices higher. Not so this summer.
The Organization of Petroleum Exporting Countries earlier this year cut way back on oil production in hopes of sparking a rally in crude prices. That has left millions of barrels in spare capacity. "They can just turn the spigot back on," Raymond James analyst Pavel Molchanov told AP.
OPEC countries did a little bit of that this spring, when benchmark crude prices doubled from February to June. Saudi Arabia, Venezuela, Iran and Angola boosted crude production from April to June this year despite an OPEC mandate to trim a collective 4.2 million barrels a day. Still, inventories of gas and crude remain high.
For consumers, that means relatively cheap fill-ups at the gas station and potentially inexpensive heating and utility bills this winter. Gas prices have inched up some because, with demand falling, refiners have cut back on production.
Yet it is output, not refining, where the major oil companies earn the most money, and the second quarter fell off drastically compared with last year's blistering pace.
Total said Friday its earnings dropped 54% and production fell by 7.3% in the second quarter. Officials with the Paris-based company blamed high maintenance, the impact of higher prices and weak gas demand for the drop in production from the previous quarter.
Chevron said Friday its net income fell 71%, and the company announced it would put its entire land-based natural-gas drilling operation in North America on hold.
"By the end of the year, we will not have a single gas land-rig running," George Kirkland, Chevron's executive vice president for global upstream and gas, said. With natural gas plunging to about a quarter of its value last year, "it really doesn't make sense right now to be drilling those gas wells," he said. Chevron still has natural gas projects in several other countries, however.
The San Ramon, Calif.-based company said its net income amounted to $1.75 billion, or 87 cents per share, for the three-month period that ended June 30. That compared with $5.98 billion, or $2.90 per share, in the same period last year. Revenue fell 51% to $40 billion.
The company said its net income suffered from a weak U.S. dollar, amounting to $453 million in reduced earnings. That compares with an income benefit of $126 million in the same period last year, according to the report.
Earlier in the week, ConocoPhillips and BP also reported dwindling profits, with income dropping 76% and 53%, respectively.
Exxon Mobil, the world's biggest publicly traded oil company, said its net income fell 66%, its worst showing in nearly six years. The Irving, Texas-based company pledged to continue spending aggressively in exploration and production. Yet company officials acknowledged that the economy has increased "downward" pressure on plans to spend $29 billion on capital and exploration projects this year.
Shell, Europe's biggest oil company, said its profit slid 67% and announced it will cut jobs and capital spending next year.
While all energy companies are suffering, those that have spread their refining operations around the world are faring better than others, Molchanov told AP.
"Petroleum demand in the United States right now is the weakest of any major economy, particularly demand for diesel," he said. "That's just reality right now."
Exxon and Chevron both had decent income from international refining operations. Meanwhile, ConocoPhillips and San Antonio-based Valero Energy Corp. struggled because they rely on domestic refining operations.
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