Payouts cut, budgets slashed, funds closed as energy cos tighten belt

Aerial Views Of The Oil Sands As Heavy Crude Trades Below U.S. Benchmark
A machine works at the Suncor Energy Inc. mine in this aerial photograph taken above the Athabasca Oil Sands near Fort McMurray, Alberta, Canada, on Wednesday, June 19, 2014. Heavy crude from the oil sands has traded at an average of $18.70 per barrel below the U.S. benchmark over the last five years due to a transportation bottleneck in North America. The discount costs Canadas economy as much as C$50 million per day, according to the Canadian Chamber of Commerce. Photographer: Ben Nelms/Bloomberg via Getty Images
Photograph by Ben Nelms — Bloomberg via Getty Images

The global energy sector is racing to adjust to the new reality of sharply lower prices, slashing payouts and postponing investments until the dust settles from the bombshell dropped last week by the Organization of Petroleum Exporting Countries.

Oil prices have plummeted since OPEC chose not to cut output, leaving the market for the world’s most important commodity drastically oversupplied. They continued their descent Friday after Saudi Arabia reportedly offered even bigger discounts for the month of January on the crude it sells to customers in Asia and the U.S..

By mid-morning in Europe, the benchmark futures contract for West Texas Intermediate was back at $66.35 a barrel, down by nearly $1 from where it was before a Wall Street Journal report late Thursday that national oil company Saudi Aramco had cut its official prices for January.

The WSJ had reported Thursday that Saudi officials now reckon the market will stabilize next year around $60 a barrel. That has profound implications for companies that have invested heavily in marginal projects on the assumption that OPEC would always trim its output to keep prices around $100–the level that many of its members need to fund their budgets.

This week alone, companies from Russia to Canada to Australia have been ripping up their old business plans as they try to work out which projects will still make money in the new environment.

The biggest casualty this week (although other, more political factors were also at work) has been Russia’s €23 billion ($29 billion) ‘South Stream’ gas pipeline under the Black Sea to south-east Europe. With OAO Gazprom’s gas prices tightly linked to oil, the math behind the financing for the project simply didn’t add up any more.

Elsewhere, the world’s biggest oil services company Schlumberger NV (SLB) announced an $800 million writedown on the value of the fleet it uses in offshore seismic work and cut the number of its ships by a third. That reflects the thinking that offshore projects, being generally more expensive, will be among the first to be cancelled or delayed.

Companies drilling in Canada’s oil sands, another type of ‘alternative’ energy source with big up-front investment needs and high operating costs, have also been under pressure. Toronto-listed MEG Energy Corp (MEGEF) Thursday cut its investment budget for 2014 by a third to $1.2 billion and trimmed its 2015 plans to make sure it won’t need to borrow. Its shares are down by more than 50% since the summer, and have fallen by a third since OPEC’s decision.

On Wednesday, Canadian Oil Sands Ltd (COSWF), the largest owner of the Syncrude Canada Ltd oil sands project, had cut its quarterly dividend 43% to conserve cash and avoid borrowing while crude prices are low.

The story is no different even if you go halfway across the world. Australian oil and gas group Santos Ltd (STOSF) scrapped plans to issue a new bond amid doubts over the outlook for its expensive liquefied natural gas projects, while Malaysian national champion Petronas also put off a decision on going ahead with an LNG export terminal in Canada, according to the Financial Times.

The fall-out has hit financial investors as well as the energy sector itself. Reuters reported that Houston-based hedge fund AAA Capital Management Advisers, which had $2 billion in assets under management at its peak, would close at the end of the year and return its remaining assets to investors. They stood at $536 million at the end of September.

But the shake-out has had some positive disciplining effects too. Egypt, which has been stalling on repaying foreign companies nearly $5 billion in respect of drilling they’ve done, has now given the go-head for its state oil and gas company to borrow $1.5 billion to it can start the repayments. One thing, it seems, is clear: in the new energy world, there won’t be any investment dollars left over for late payers.

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