XOM Exxon Mobil Corp

By Sarah Kent and Robb M. Stewart 

The world's largest energy companies are sidelining big ideas that they touted just a couple of years ago as the future of the industry.

From Australia to the U.S. Gulf Coast, the casualties include ultra-deep-water drilling projects, huge boats that serve as floating liquefied natural gas factories and technology that could drastically reduce emissions from burning fossil fuels. Royal Dutch Shell PLC, Chevron Corp. and Australia's Woodside Petroleum PLC are among the big companies to pull back or delay ambitious projects.

Shell hammered home the message on Wednesday after reporting first-quarter profits that were down 83% from the same period a year before. The Anglo-Dutch oil giant said it would cut its capital spending budget another 10%, to $30 billion this year.

"To be brutally honest, any large new greenfield investment whether floating LNG, deepwater or elsewhere is under very strict critical review for cost levels and return simply because of where the industry is," Shell Chief Financial Officer Simon Henry said in a conference call.

As of March, the oil industry has deferred or canceled $270 billion in projects since crude prices began crashing nearly two years ago, according to estimates from Norway-based consultancy Rystad Energy. The bulk of those spending cuts have involved high-tech projects once seen as crucial to sustaining global energy supplies.

It is a dramatic turnaround from the last decade when surging demand for oil and dwindling resources sent crude prices soaring and big energy companies pushing into new frontiers regardless of the cost.

According to information and analytics firm IHS Inc., the oil-and-gas industry spent about 15% less on research and development in 2015, when crude oil prices averaged roughly $50 a barrel, compared with 2014, when prices averaged close to $100 a barrel.

"We see a pullback from customers on really complex projects," said Kishore Sundararajan, chief technology officer at GE Oil & Gas, General Electric Co.'s energy industry services division.

Efforts to re-create the U.S. shale boom abroad have also suffered. The volumes unleashed by the technique of hydraulic fracturing are largely to blame for the current market downturn, but exporting the technique abroad have been stalled by political, geological and technical reasons, compounded by slumping energy prices.

Now, the focus increasingly is on technologies that can reduce costs and improve efficiency as the world's biggest oil companies continue to slash billions from their budgets and cut thousands of jobs.

ConocoPhillips last week said it would reduce spending by a further $700 million this year, drawing about half the savings from a decision to forgo deep-water drilling in the Gulf of Mexico. In March, Exxon Mobil Corp. announced plans to cut its capital spending 25% in 2016 and said it would be "highly selective" about investments. BP last month raised the prospect that it could pull back spending further if the oil market remains under pressure next year.

Prices have risen to their highest levels this year, with Brent crude, the international benchmark, reaching $48.50 a barrel at the end of April. Even so, companies remain cautious on returning to complex and expensive new areas.

"We wouldn't be looking to significantly ramp up [even] if we see oil prices come back up to $60 a barrel," BP CFO Brian Gilvary told analysts in April. "We're really looking at what we can do around the margins of the existing portfolio."

Among the most high profile victims of the price crash are floating LNG plants -- huge ships that are essentially seafaring factories built to exploit remote gas fields. Natural gas was long transported only by pipeline; LNG plants turn the gas to a liquid, allowing for shipment to markets around the world.

Woodside Petroleum last month shelved plans for a floating operation at its Browse field off Australia's western coast that analysts estimated would have cost about $40 billion. The company says it still favors floating LNG, but it isn't going to happen in the current market environment.

Work on such floating gas factories has been under way since the early 1990s, but there still isn't one in operation. Slumping prices and a looming oversupply of natural gas is gradually killing off nascent plans for further projects.

"Big heavy capital projects at the moment are not in favor and so putting huge amounts of money into that at the moment is probably not the wisest thing to do," Woodside Chief Executive Peter Coleman said in April.

Costly efforts to make the oil sector more environmentally friendly through carbon capture and storage also are vulnerable to the oil price slump. Known as CCS, the projects grab carbon dioxide released from industrial processes and funnel it underground.

Such CCS projects are seen by many energy-sector analysts as crucial to preventing catastrophic climate change, and many in the industry have also been vociferous advocates of the technology.

Shell and Chevron are leading ambitious projects in Canada and offshore of Australia, respectively. But follow-on projects in the oil sector have been slow to get off the ground. CCS remains expensive and often dependent on government subsidies. Shell last year scrapped a proposal for a plant in the U.K. after the government withdrew GBP1 billion in support. The low oil price puts additional pressure on any new project.

"It is still early days for these types of projects and they are costly, " Chevron CEO John Watson said in Perth last month.

In the deep waters of the Gulf of Mexico, oil companies are examining new opportunities warily. Chevron wrote off $500 million last year after it canceled its Buckskin-Moccasin development project in the region. BP has yet to make a final decision on whether to proceed with the much-delayed second phase of a project that taps oil and gas reserves at depths of 4,500 feet.

Of course, not every big project is being put off. But those getting the go-ahead are taking cost cuts. For instance, BP has said it still expects to go ahead with its so-called Mad Dog project in the Gulf but believes more savings are possible. It has already squeezed around 50% from the cost of early plans that involved a customized design and came in at around $20 billion.

Shell opted to move ahead with its Appomattox project, targeting production of 175,00 barrels of oil equivalent a day from a depth of 7,200 feet in the Gulf of Mexico -- one of a handful of developments to get approval last year -- after bringing down costs by 20%.

The company's giant Prelude floating LNG tanker, currently under construction, will likely be one of the first to test the technology. The project offshore Australia is expected to be in production by 2018.

Write to Sarah Kent at sarah.kent@wsj.com and Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

May 04, 2016 15:19 ET (19:19 GMT)

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