Low oil prices could persist into 2017

Centrica has cut its exploration and budget 40% saying that it thinks oil prices will remain low for the rest of 2015 and potentially also into 2016 and 2017. 

The comments, made by the firm's CEO Iain Conn, echo BP CEO Bob Dudley's recent predictions about a protracted low oil price environment.

Image: Centrica's Morecambe Bay assets, UK. 

Conn, who joined Centrica at the start of the year, said: "It is not clear that the forward price curves for oil and gas will improve in the near term, and we therefore need to plan on the basis that lower wholesale prices will persist for all of 2015 and potentially through 2016 and into 2017."

Marathon Oil CEO Lee Tillman yesterday (February 18) described the fall in oil prices, from over US$100/bbl in June last year to about $50/bbl, as a "rapid correction in commodity prices," also suggesting the lower prices were not short-term. 

Conn said he expected industry costs to fall in this environment. He said: "During this time we expect the exploration and production supply chain costs to respond to the lower price environment. Until that time, the group’s cash flows from Centrica Energy will be materially impacted."

Centrica, which has upstream, power and distribution business, would also cut its budgets. "We expect exploration and production capital expenditure to fall to approximately £800 million in 2015 and to approximately £650 million in 2016, around 40% lower than 2014 levels," Conn said, adding that the firm would also be reviewing its longer term strategy, with the results expected by its Interim Results in July.

Centrica's upstream business Centrica Energy saw its gross revenue fall by 17% in 2014, with operating profits falling 44%. Group revenue increased by 11% to £29.4 billion (2013: £26.6 billion).

"We are taking immediate actions to improve cash flows, focusing on reducing exploration and production P capital expenditure relative to 2014 levels by around £250 million in 2015 and a further £150 million in 2016, and reducing cash production costs," said Conn.

"We will also maintain a tight control on production costs, examining all internal and external supply costs for our operated fields and working with our partners to reduce costs where we are not the operator. Reflecting these actions, we are targeting a 10% or £100 million reduction in our 2016 lifting and other cash production costs compared to 2014 levels, including absorbing the incremental costs of the Valemon [offshore Norway] and Cygnus [UK southern North Sea] fields which will be on-stream."

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