Norway’s state oil company Equinor announced NOK 33 billion worth of budget cuts on Wednesday, just before oil prices fell again. CEO Eldar Sætre insists the company remains strong, but needs to cut back on investments, oil exploration and operations in order to stay that way.
The cuts came on a day when the price of a barrel of Norway’s North Sea crude oil fell another 5 percent, briefly landing under USD 25 before moving back over USD 26 in early afternoon trading. Equinor can still turn a profit on oil pumped from its huge new Johan Sverdrup offshore oil field west of Stavanger, even when prices fall in the USD 20s, but not on many other operations.
The recent oil price collapse and the enormous market volatility set off by the spread of the Corona virus are shaking Norway’s biggest company along with many others. Sætre, in a interview with newspaper Dagens Næringsliv (DN) last week, had admitted to never having experienced “anything even close to what we’re seeing now” during his nearly 40 years in the oil industry.
“This is an extraordinary situation where we have many challenges at the same time,” Sætre told DN. “It’s very demanding.”
The veteran of the state oil company formerly known as Statoil cited “the complexity and extent” of the Corona crisis, “the uncertainty” it creates, and not least how fast everything has been happening over just the past two weeks. “This is affecting individuals, families, the society, industry and us as a company,” Sætre said.
The company responded on Wednesday with deep cuts in its budgets for exploration (from USD 1.4 billion to USD 1 billion) and investments (from USD 11 billion to around USD 8.5 billion), while overall operating costs will be cut by USD 700 million. It all adds up to the equivalent of around NOK 33 million given Norway’s weak krone. Most of the cuts will be made in Equinor’s land-based operations in the US, while there will also be some reduced exploration activity on the Norwegian Continental Shelf. Work on Equinor’s Martin Linge field has already been halted after a worker tested positive for the Corona Covid-19 virus.
Sætre had told DN last week that the company was “working on the financial” aspects of its business, and evaluating “activity, staffing, activities that aren’t important for production or safety, all this that comes in under costs. We’re working with everything, also investments. We’re asking ourselves whether it’s meaningful to launch exporations projects now.” He and his fellow Equinor executives are also giving up any bonuses for 2020.
He stated in Wednesday’s announcement to the Oslo Stock Exchange that Equinor remains in a “strong financial position to handle volatility and uncertainty in the market.” He claimed Equinor’s strategy was firm and that the company was taking new steps “to further strengthen our robustness” at a time when the virus was spreading and oil prices were low.
Sætre had also stressed to DN that Equinor has never, in his opinion, been better prepared to handle all the uncertainty. “I have never felt we’re better equipped to handle such a crisis,” he said. “We have a well-run organization, strong preparedness and solid financial positions.” All the cost-cutting carried out when oil prices also collapsed in 2014 left Statoil/Equinor a leaner and more profitable organization. Investors responded favourably to Equinor’s announcement on Wednesday, sending its share price up by 4.58 percent to NOK 119.80 a share by mid-afternoon.
Equinor has also been able to maintain its production during the Corona virus outbreak and taken steps to reduce the risk of the virus on its oil platforms. Asked whether any platforms may need to be shut down, either for health or production reasons, he said that “we can’t make any guarantees or rule it out, but up to now, we’ve been able to handle this.” While its Bay du Nord project off Newfoundland with Husky Energy has been postponed, Equinor was the highest bidder for five oil fields in the Gulf of Mexico.
Oil supply high, demand low
Several oil analysts, meanwhile, have been issuing gloomy predictions for the oil business that has fueled Norway’s economy for the past 50 years. Demand for oil is falling as a result of the global business slowdown from the virus and the halt in travel, airline traffic, cruise ship operations and even driving. With people all over the world now told to just stay home and winter heating needs ending, oil supplies are higher demand. Then Russia and Saudi Arabia launched a price war, sending the price of oil from around USD 60 a barrel just last month to the USD 25-26 level this week.
Oslo-based analyst Jaran Rystad of Rystad Energy has predicted that oil prices can fall further, maybe even down to USD 10 a barrel. “We can’t rule out anything,” Sætre told DN when asked to comment on Rystad’s prediction.
Other Norwegian oil- and oil service companies also face low oil prices, a sharp drop in demand, a halt in investment and oil storage facilities that will soon be full. Then come all the Corona containment measures that present staffing challenges throughout the industry. At Aker ASA, employees’ representative Atle Tranøy told newspaper Klassekampen on Wednesday that several projects that would have given business to suppliers in the oil service industry are now being stopped.
High production and low demand remains the biggest concern for oil companies. “We’re going to get so much oil that there won’t be storage capacity,” Rystad told Klassekampen. “Then you have to halt production. It may be a cliché, but this is the perfect storm.”