Dangerous and difficult oil fields that looked like goldmines when crude fetched more than $100 a barrel have turned into money pits as oil crashes to multiyear lows.
Collapsing oil prices not only shrink profits for producers and imperil dividend payouts prized by investors, they can cripple a company’s future growth by starving it of cash needed to find, drill, assess and equip discoveries. A spending halt in deep-water fields and Canada’s oil sands could disrupt the chain of new projects needed to keep the world supplied as older wells dry up.
For the biggest explorers, the impacts of slumping prices are dramatic. Every $10 price drop erases $2.8 billion in annual cash flow for Exxon Mobil Corp., according to analysts at Barclays Plc. (BARC) For Chevron Corp. (CVX), which is more crude-dependent than its bigger rival, a $10 change translates to $3.85 billion in cash flow.
“Because of their long lead times, once canceled or postponed, oil sands and deep-water projects cannot be brought online at short notice in response to rising prices,” Chief Executive Officer Andrew Hall said in a Jan. 2 communique to investors in his Astenbeck Capital Management commodity funds. “This sets up the potential — if not the inevitability — for supply shortfalls in the future.”