Bankers Goldman Sachs’ latest report recommends that the oil industry cut its costs by at least a fifth and adds that uneconomic projects need to be abandoned. Cash-strapped firms may need to sell their better projects onto rivals with a stronger balance sheet.
Goldman’s estimate that costs across the industry need to be slashed by 20-30 per cent.
For the world’s largest oil companies, referred to as big Big Oil, this calls for a 30% cut to capital expenditures, just to get the free cash-flow generation back to an acceptable level.
Goldman’s identifies cash-flow generation as one of the key concerns in the world of sluggish oil prices.
With oil prices around $70, some unprofitable projects will have to be scrapped in a bigger mix-and-match exercise, according to the report.
There are several high-quality developments that are in lack of funding, while some poor-quality projects are owned by companies with strong balance sheets.
Golman’s analysts advise that assets need to be redistributed, so the firms with solid balance sheets get rid of the uneconomic ventures and instead upgrade their portfolio with more promising projects.
Goldman slashed its forecasts for the next two years, predicting Brent crude would average just $50 per barrel in 2015 (down from a previous forecast of $83), and $70/barrel in 2016 (down from $90).
The Wall Street firm has concluded that the OPEC cartel will not cut output to halt the price slide. Instead, it believes OPEC members are determined to inflict pain on the US shale industry.
Or as Goldman puts it: “To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer.
“The search for a new equilibrium in oil markets continues.”