As Oil Prices Plummet, Unocal Plans Cuts
On a day when oil prices hit their lowest level since 1986, Unocal Corp. said it will cut long-term investment spending by a minimum of 35% next year, a reflection of the soft crude market that analysts say could persist for months, perhaps years.
The El Segundo company thus joins several other oil companies, including Arco and Chevron Corp., in scaling back its capital spending, most of which goes toward costly oil and gas discovery. As a whole, the industry will spend a third less next year than it did in 1998 on finding and developing energy, Rothschild Inc. analyst Sal Ilacqua said Monday.
Unocal’s 1998 capital budget of $1.7 billion is being spent mainly on projects in the Gulf of Mexico, Thailand and Indonesia. The cuts will not affect the firm’s controversial investment in a natural gas field and pipeline in Myanmar. Next year, spending will fall to between $1 billion and $1.1 billion, Unocal Chairman Roger C. Beach said. Cuts will be made across the board, with no single geographical area singled out.
The planned cuts reflect the oil industry’s ongoing retrenchment amid expectations that oil prices will remain depressed in the foreseeable future. Unocal’s cutbacks, combined with those previously announced by other major oil companies, are already rippling through hundreds of service and supply firms, from drillers to seismographers.
The company did not announce new layoffs, nor did it rule them out. In a statement, Beach threatened to make even deeper capital spending cuts if commodity prices do not rebound.
Prices of crude oil for January delivery dropped as low as $10.35 per barrel Monday, the lowest since 1986, before recovering to close at $10.81. That’s down 14 cents from Friday, and half the price of 14 months ago.
The continued slide in prices has the industry wondering if and when the market will recover. Until it does, oil companies say they will spend much less on finding and developing crude because prices do not justify the expense.
That augurs poorly for the state’s $600-million oil field services industry, though Unocal has long since sold all of its California oil properties.
Last week, Arco announced a 25% capital budget cut and Chevron said it would trim 10%. Occidental Petroleum and Amerada Hess also are cutting back. Those companies’ cuts all are accompanied by layoffs.
Unocal announced last month a series of cost-cutting measures: closing offices in Central Asia, slashing administrative expenses companywide and reducing the mining activities of its Molycorp subsidiary in New Mexico and California.
Those cuts and others would produce an unspecified number of layoffs and about $120 million in cash savings, Unocal then said.
On Monday, Unocal raised its cost-cutting target for 1999 to $200 million. Still, the company would not discuss possible additional layoffs. “The target is dollars,” Unocal spokesman Barry Lane said.
Unocal’s third-quarter net profit was $36 million, down from $177 million during the same period last year on roughly comparable revenue of $1.4 billion. Unocal shares fell 25 cents to $30.31 on the New York Stock Exchange.
Like other companies, Unocal is in a difficult situation of trying to balance the short-term losses that oil production generates at these prices with the long-term necessity of replenishing reserves.
The drop in capital outlays has long-term implications for the oil market in terms of reduced supply and the U.S. goal of reducing its dependence on the Organization of Petroleum Exporting Countries.
Partly because of reduced capital budgets, only 200,000 additional barrels of daily oil production will come from non-OPEC countries next year, down from 800,000 barrels in 1996-97, said Steve Pfeifer, Prudential Securities’ senior oil analyst.
