Shell, BP Delay Projects, Anticipate Lower Costs, Moody’s Says

By Eduard Gismatullin

Aug. 4 (Bloomberg) — Royal Dutch Shell Plc and BP Plc, Europe’s biggest oil companies, are putting some final investment decisions on hold in anticipation that project costs will drop, said Moody’s Investors Service Ltd.

Shell and BP last week said their cost saving are limited because they signed contracts to deliver projects. Still, if oil prices fall to $60 a barrel, industry costs should continue to decline, said Francois Lauras, a London-based senior credit officer at Moody’s.

“Projects that have already been approved don’t really benefit from ongoing cost deflation,” Lauras said yesterday in an interview. “Companies are trying to benefit from cost deflation and therefore refraining from new final investment decisions right now to get the benefit of lower costs in the future.”

The oil industry scrapped or delayed $170 billion worth of projects between October and mid-April as crude futures have fallen by more than half since peaking at $147.27 a barrel last July, according to the International Energy Agency. Oil field service and equipment manufacturing costs doubled from 2004 through 2008, according to BP and Shell.

Major oil companies will have about $54 billion of free cash flow deficit this year as they maintain investments and continue to pay dividends, according to Moody’s estimates. BP reiterated July 29 its plan to invest less than $20 billion this year, while Shell reiterated two days later its forecast to spend about $31 billion on projects this year and cut investment 10 percent next year.

BP reduced twice its 2009 spending target and pushed back the first heavy-crude production from its Sunrise oil-sands project in Canada’s province of Alberta by at least a year.

Shell postponed in January investment decisions on upgrading its deepwater Mars platform in the Gulf of Mexico and developing the Pierce field in the U.K.’s North Sea after delaying in November the expansion of its oil-sand projects in Canada.

Negative Outlook

Moody’s has a negative outlook for the integrated oil industry.

Shell Chief Executive Officer Peter Voser said July 30 that “energy demand is weak,” echoing BP CEO Tony Hayward, who two days before said that his company sees “little evidence of any growth in demand.”

Demand for oil from the Organization for Economic Cooperation and Development fell by about 3 million barrels a day from the same time last year, according to BP’s last week estimates.

The oil stockpiles in the OECD nations rose to 4.3 billion barrels in March, the latest available data from the U.S. Department of Energy. That’s the highest level since at least 1997, the earliest data available on Bloomberg.

“To stabilize the outlook we would have to be confident that the adjustment to industry costs was sufficient to allow the majors to be at least cash flow neutral after capital expenditure and dividends,” Lauras said. “A lot of the majors will be significantly free cash flow negative in 2009.”

To contact the reporter on this story: Eduard Gismatullin in London at [email protected]

Last Updated: August 3, 2009 21:00 EDT

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