Tullow Oil to pull back on heavy spending

Tullow Oil chief executive Aidan Heavey yesterday made it clear that the company is pulling back heavily on exploration spending. Instead it will focus on development and production, and on areas, specifically east Africa, where it has already established the presence of considerable quantities of oil with the potential for more.

Exploration and appraisal spending in 2015 – and possibly coming years – will be about $300 million, 60 per cent less than the $940 million it spent in 2013 and far below the $600 million to $800 million annually that it was saying it would spend during the summer.

Falling oil prices are behind this. For four years, the commodity traded at more than $100 a barrel, enough to cover exploration costs and justify the risks. Increased production has reversed this trend sharply.

Yesterday, Brent crude, the global benchmark, could be had for about $80.90 a barrel while other grades were $77 a barrel.

As output is not showing any signs of slowing, those low prices look like being sustained for some time. So, it is simply not worth Tullow’s while exploring for oil in areas other than those where risks and costs are low.

A consequence is that the company will have to write down the value of a number of assets when it comes to its 2014 results, a fact that did not bother the markets yesterday as its share price rose 2.2 per cent.

In one way, a bigger issue for Tullow is that it is particularly good at finding oil – an activity on which it now has to cut back. However, it is only a matter of time before that skill is centre stage once again.

Oil consumption is projected to grow from about 90 million barrels a day now to 97 million in 2020 and 111 million in 2040. That long-term demand means that the price pendulum will inevitably swing back the other way.