Two of the largest integrated oil and gas majors are slashing capital spending budgets to help stave off short-term bloodletting expected from the plunge in global oil prices and the contraction in demand brought on by the coronavirus pandemic. Lower-for-longer crude price scenarios have prompted Total SA and Royal Dutch Shell PLC to start pulling initial levers, with both announcing plans March 23 to cut capital expenditures and suspend share buybacks.

Shell will slice 2020 spending by at least $5 billion, to $20 billion or lower; trim underlying operating costs by $3 billion to $4 billion per year over the next 12 months; and delay the next $1 billion tranche of its massive $25 billion repurchase program.

"The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past," CEO Ben van Beurden said March 23.

Analysts expected the majors to start announcing deep capex cuts after a host of independent producers disclosed plans for spending reductions last week. Shell's announced reductions are expected to improve free cash flow by about $8 billion to $9 billion in 2020 on a pretax basis.

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"While we'd anticipated capital cuts, a cut to maintenance capital is a welcome surprise in the current environment, with prior expectations for primarily a slowing of short-cycle capital in the shales portfolio vs. broader slowdown of major capital projects," Tudor Pickering Holt & Co. wrote in a March 23 note to clients.

Since March 9, global oil prices have tanked due to the price war between OPEC and Russia as well as demand destruction from the coronavirus. West Texas Intermediate crude oil futures settled March 23 at $23.36 per barrel, declining 61.7% year-to-date. Brent crude oil futures closed at $27.03/bbl, losing 59% year-to-date.

Before the recent price crash, Shell executives had warned investors that a prevailing weak macroeconomic outlook, including soft refining and chemical margins, could affect its ability to reduce gearing to 25% and that as a result, the share buyback program might be delayed.

While the dividend could be a burden, the company has available liquidity — $20 billion in cash at the end of 2019 and another $10 billion in undrawn credit facilities — "to weather the current storm," Tudor Pickering Holt said.

France's Total SA will also pause its $2 billion buyback program and plans to trim organic capex by more than $3 billion. The revised capex will reduce net investments for this year to less than $15 billion, with savings mostly in the form of short-cycle spending and projects.

"Project sanctioning schedules are expected to face delays of several months — even for those with breakeven requirements of less than $40 per barrel, let alone those with higher costs — as most oil companies will prefer to wait for the spread of COVID-19 to slow down and for the market to start to recover," Audun Martinsen, Rystad Energy's head of oilfield service research, said March 23.

Norway's Equinor ASA, which said March 22 that it will suspend its up-to-$5 billion share buyback program, is also adopting measures to decrease its capital expenditures, operating costs and exploration spending and will disclose an updated plan by the end of March.

Mizuho analyst Paul Sankey said March 23 that the spotlight is now on Exxon Mobil Corp. and Chevron Corp. to make similar announcements about spending cuts for the year.

On March 17, Exxon said it signed a deal to raise $8.5 billion in new debt after the Federal Reserve kicked off a funding facility that same day to try to shore up the commercial paper market. Rates have jumped in recent days and have made it more expensive for companies to borrow short term.

Exxon added that it was also evaluating significantly reducing capital and operating expenses in the near term due to the recent erosion in market conditions. The company's previous capex guidance was $33 billion for 2020.

California-based Chevron confirmed March 10 that it was evaluating ways to cut costs and ratchet down spending, which could also slice into the company's oil and production.