Shell joins other oil giants in slashing spending after coronavirus and ‘oil war’ between Russia and Saudi Arabia causes prices to collapse

Royal Dutch Shell has announced it is planning to save at least $8billion in the coming year following the huge fall in oil prices.

The world’s ninth-largest company by revenue says capital expenditures are to be scaled back by $5billion. At the same time, underlying operating costs will be cut by at least $3billion to help cope with the impact of the coronavirus.

It still plans to go ahead with their $10billion divestment programme but have cancelled the next tranche of their share buyback programme.

CEO Ben van Beurden says the moves were necessary ‘to ensure the financial strength and resilience of our business.’

All of Shell’s different business segments are reviewing their spending to achieve the targeted cuts, a company spokeswoman said.

‘The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past,’ van Beurden stated.

Shell’s move follows cost reductions announced by other oil companies, which have been hit by a dramatic one-two punch in recent months that has caused their share prices to plummet and thousands of workers to be laid off.

Firms like Saudi Aramco have declared their intent to slash capital spending expenses to make up for the lower oil price, with Aramco planning capital savings of up to $7.8billion, and Total doing over $3billion in cuts.

Troubles began with the coronavirus outbreak in Asia that sharply reduced oil demand from the continent and were later exacerbated by Russia and the Organization of Petroleum Exporting Countries (OPEC) failing to agree on production cuts.

Around the early part of January, a barrel of Brent Crude oil was trading at about $69. It had fallen to just over $59 on 20 February, before plunging off a cliff to $26.2 today.

Even before the coronavirus outbreak, Shell faced weaker revenue because of slowing demand for petrochemicals, which led it to slow its $25billion three-year share buyback programme late last year.

‘We will continue to review the dynamically evolving business environment and are prepared to take further strategic decisions and consider changes to the overall financial framework as necessary,’ the company said.

Many oil businesses have gone into financial turmoil due to the value of oil collapsing. After the ‘oil war’ between Russia and Saudi Arabia was triggered, Shell and BP lost a combined £32billion minutes after the FTSE 100 opened on 9 March.

Occidental Petroleum took on $40billion worth of debt after it acquired Anadarko last year and had recently its credit rating downgraded by Moody’s. Moody’s has also estimated that North American oil explorers and producers have $86billion in debt.

Major energy groups like the International Energy Agency (IEA) and senior oil firm executives like BP chief financial officer Brian Gilvary predict that oil demand will fall this year mainly because of shrinking demand from China.

This would be the first time since the global recession in 2009 that oil demand contracts. In the IEA’s March oil market report, it wrote:

‘The immediate outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity.’

Shares in Royal Dutch Shell climbed 5.3 per cent this morning to 1,119p.

SOURCE 

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