Amazing how a few years ago there was peak oil and all the news articles justified the price of oil over $100 a barrel, and now the producers are slashing costs because the price of oil has collapsed due to oversupply. Aivars Lode
Aramco looks for cut costs, asking oil-services providers for deals; pushing for a phone-bill discount
By Summer Said and Benoît Faucon
Saudi Arabia’s refusal late last year to rein in oil production helped trigger the price crash that has hurt oil-producing countries and publicly listed energy companies alike. And now even the kingdom’s own oil company is feeling the pain.
As a result, state-owned Saudi Aramco is looking for ways to cut costs everywhere, from pushing contractors for better deals on oil-well services to negotiating discounts on its phone and power bills, according to people familiar with the matter.
The company—the world’s largest oil producer—is also considering slashing its future spending on production and exploration by as much as 25%, much like private oil companies, industry sources said.
“Like everyone else, we’re using the downturn as an opportunity to sharpen our fiscal discipline,” Aramco CEO Khalid Al Falih said in public remarks during the World Economic Forum in Davos in January. “We’re cutting on a few things that we could cut, but we’re as committed as ever to our long-term strategy.”
The measures demonstrate some of the risks the Organization of the Petroleum Exporting Countries took when it decided in November to forsake its traditional role of cutting production to boost prices. The Saudi-backed decision has hurt big, publicly listed companies, such as Royal Dutch Shell PLC and Chevron Corp., but is now ricocheting and hitting national oil companies.
Not only is revenue to state treasuries falling, but OPEC nation oil companies—like their private counterparts—are making cuts that may make it difficult for them to capitalize when prices begin to rise.
The measures are a departure for Aramco, which had boosted its spending on pumping oil and launched its first efforts at deep-sea production when crude was regularly trading at more than $100 a barrel from 2011 to 2014. The price of Brent crude, the world benchmark, has nearly halved since June, trading around $60 a barrel in London on Thursday.
To be sure, the retrenchment is small scale for Aramco and Gulf oil producers—whose production costs are much lower than for most international rivals—and executives say it won’t threaten output levels in big fields in Saudi Arabia, Kuwait or the United Arab Emirates. The cuts don’t appear to be as deep as those after the mid-1980s price crash, when Aramco and others laid off thousands of workers and cut back production to historically low levels.
Government companies like Aramco and others in the Gulf hold monopolies on the production of their huge crude reserves and don’t have to produce public accountings of their business, so it is difficult to know precisely what they plan to spend and cut or whether they are losing money.
But oil prices have produced a new cost-consciousness across the Persian Gulf’s state-owned companies.
In December, Aramco was advised by the Saudi government to cut costs, one Saudi official said. Aramco, which usually bases its investment on oil supply and demand, is trying to execute some projects at lower costs, while deferring others until the picture of the oil market is clearer, the official said.
Aramco executives are considering slashing production and exploration spending to $30 billion a year from $40 billion while oil prices remain low, according to industry sources.
Aramco has joined oil companies, big and small, in pushing aggressively for discounts from its contractors, seeking rebates from telecommunications providers and power suppliers, for example, according to executives.
In December, the Saudi oil company summoned oil-services companies including Baker Hughes Inc., Halliburton Co. and Schlumberger Ltd. to its offices in the northeastern city of Al Khobar to ask for discounts of up to 20% on certain services, for instance, well-testing procedures, according to people familiar with the matter. The companies do about $6 billion a year in business with Aramco combined, according to people familiar with the matter.
Baker Hughes offered a small discount, but Aramco has held out for 20%, according to people familiar with the matter. The two parties are still in talks to find a common ground, but no contracts have been canceled, they said.
Halliburton, Baker Hughes and Schlumberger declined to comment.
In an earnings conference call last month, Baker Hughes Chief Executive Martin Craighead said the company was in discussions with “bigger companies with pretty sophisticated procurement groups” to reduce prices. In an earnings conference call at Schlumberger, CEO Paal Kibsgaard said he expected a reduction in spending in the Middle East.
Also in a conference call, Halliburton Chairman Dave Lesar said he anticipated “headwinds” in the Middle East, though he expected his company to be more resilient than most, notably because of recent contracts in Saudi Arabia.
Aramco has pushed back by a year plans to build a $2 billion clean-fuels plant and put on hold deep-water oil and gas exploration and drilling activities in the Red Sea because their profitability is now in question, said people familiar with the matter.
Geologists have estimated that Saudi territory in the Red Sea could hold the equivalent of more than a third of the Kingdom’s known oil-and-gas reserves, but these reservoirs are also much more expensive to develop than onshore.
Deep-water projects world-wide typically need $53 a barrel to break even, according to Norwegian energy consultancy Rystad Energy.
Aramco isn’t the only big state oil company seeking to cut costs.
Suhail bin Mohammed al-Mazroui, the oil minister of the United Arab Emirates, said in January that his country, along with other producers, would squeeze oil contractors’ costs to adapt to lower oil prices.
“We will need the service companies and contractors to understand the cycle [of the oil market],” he said at an energy event in Dubai.
Qatar Petroleum said earlier this year it has shelved a petrochemicals project in the Gulf emirate with partner Shell.
In Oman, a Gulf country with moderate oil reserves and production that isn’t an OPEC member, state company Petroleum Development of Oman postponed in December the award of a $1 billion contract to supply and manage oil-production pumps for seven years, according to people familiar with the matter. The government informed bidders they will have to wait for a year to see how oil prices are evolving before committing to major projects, one Omani official said.
While Aramco is beginning to feel some pain, OPEC doesn’t appear likely to change its strategy of maintaining production before its next meeting in June. The cartel has put a premium on maintaining its customer base, and Saudi Arabia has made tactical price cuts.
This week, PIRA Energy Group, a New York research firm, said Saudi Arabian production was pumping more crude than usual, as much as 10 million barrels a day—close to Aramco’s estimated capacity.