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Chevron cuts spending by 24% as Big Oil feels the pinch

US supermajor Chevron will slash investment in 2016 as the oil price rout continues, announcing on Wednesday a reduction in spending to $26.6bn next year

Chevron is the first of the oil majors to unveil its 2016 spending programme, and its plans point to an extended period of austerity ahead for Big Oil as the lower-for-longer oil price mentality sets in. The company has said that spending could fall to as low as $20bn in 2017 and 2018 if oil prices don’t rebound, about half what the company spent in 2014.

The capital expenditure cuts also highlight how far oil majors are willing to go to maintain their dividend payouts. Chevron has said that the dividend is its number one priority, and as revenues continue to fall that is increasingly coming at the expense of spending on exploration and production. The company is on pace to pay out around $8bn in dividends this year.

Chevron was always likely to pull back spending this year as its Wheatstone and Gorgon Australian LNG megaprojects near completion, but the cuts will now go much deeper. Exploration spending, for instance, will be just $1bn, down from $3bn in 2015. US upstream investment, including spending on shale fields, will be $5.4bn, down 35% from last year. The company has set aside several billion dollars for the major Tengiz oil project in Kazakhstan.

“Hundreds of billions of dollars are being taken out of the business right now”

The other oil majors are likely to follow suit with steep spending cuts as they unveil spending plans in the coming weeks. “Hundreds of billions of dollars are being taken out of the business right now,” John Watson, Chevron’s chief executive, told US television outlet CNBC this week.

Chevron plans a strategic shift away from costly megaprojects like Wheatstone and Gorgon towards short-cycle projects with lower costs like shale amid the downturn. The company in particular has been focusing on the Permian and Marcellus shale plays in the US, the Duvernay shale gas play in Canada, which could eventually feed a West Coast LNG project, and the Vaca Muerta shale in Argentina.

“You'll see a more balanced portfolio, and I think you'll see projects that will have good economics at moderate prices, as we work to standardise and take costs down,” Watson told analysts in November.

While it is looking to shift its focus, the company will continue to pump money into conventional and deep-water projects. “I think what's important, though, is if you step back and look at the market overall, it's a 95m barrels a day (b/d) market. The shales are about 5m b/d,” Watson said. “We're going to need all forms of supply, and what we're doing is trying to take on cost reductions and get better everywhere.”

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