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BHP is the latest company to slash its shale drilling forecast

BHP is scaling back drilling at marginal operations and looking to sell some acreage, such as this site in Fayetteville.BHP is scaling back drilling at marginal operations and looking to sell some acreage, such as this site in Fayetteville.
BHP is scaling back drilling at marginal operations and looking to sell some acreage, such as this site in Fayetteville.Courtesy of BHP

BHP Billiton Plc (BHP) has become the latest big oil name to slash its outlook for production from U.S. shale this year in response to falling prices.

The Australian-based company said Wednesday it would cut the number of drilling rigs it operates by 40%, from 26 to 16, by June, paring back drilling in the Permian Basin in east Texas and concentrating on its most profitable operations at Black Hawk further south in the Lone Star state.

BHP also hinted that it might make further cuts this year if prices stay low.

“We will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production,” it said in a regular update of its operations. It promised an update next month.

The company is one of many that raised production sharply in the second half of last year, pumping an average of over 130,000 barrels a day from its Black Hawk and Permian acreage. However, it had already begun to cut production in the final quarter as prices started to fall.

Crude prices have fallen over 58% since September as surging supply from the U.S. and Iraq, among others, have outstripped demand from a weakening global economy. Although prices have stabilized in recent weeks at between $45-$50 a barrel, they lurched to the lower end of that range Tuesday after data showing Iraqi output at a record high, while Iran defiantly said it could withstand a spell of prices as low as $25/bbl.

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Announcements like BHP’s are fast becoming the norm as the collapse in oil prices forces companies to cut down spending on wells that will only make a profit at higher prices. Patrick Pouyanné, the CEO of French major Total SA (TOT), said in an interview published Tuesday that he will cut the exploration budget by 30% this year to less than $2 billion and mothball two high-cost projects in the Canadian oil sands.

Such decisions are forcing a dramatic adjustment on the oil services industry. Schlumberger Ltd. (SLB) and Baker Hughes Inc. (BHI), two of the world’s biggest oilfields services companies, intend to cut a total of 16,000 jobs in response to the slump, according to recent announcements.