By Erin Ailworth and Bradley Olson 

As crude prices slide toward $25 a barrel, many oil companies have little choice but to start making the steep cost cuts they have avoided up until now, jettisoning every well that can't break even or isn't needed to keep the lights on.

"Folks are coming to grips with the reality," said Dennis Cassidy, managing director at consulting firm Alix Partners, of the 20-month-and counting oil bust that many now fear will wipe out profits in 2016.

U.S. and Canadian producers are losing at least $350 million a day at current prices, according to an AlixPartners analysis. Some Canadian companies are now warning they may be forced to shut down older oil-sands sites if prices fall even further.

"For the month of January we did not make any money on our oil sands," said Brian Ferguson, CEO of Canadian producer Cenovus Energy Inc., in an interview.

The U.S. benchmark oil price lost $1.24 a barrel Thursday to settle at $26.21, down nearly 30% since the start of the year. Brent crude, the global oil benchmark, fell 78 cents to $30.06, a 20% drop so far this year.

Daniel Yergin, vice chairman of energy consulting firm IHS Inc., said sub-$20 oil shouldn't happen unless crude storage tanks are completely filled, leaving producers no place to stash the fuel they pump. He said many in the market are more bearish than he is.

In the U.S., more than 500 million barrels of oil are in storage now, near levels not seen at this time of year since the Great Depression, according to the latest federal data.

Globally, nearly $1.5 trillion worth of oil spending will be canceled between 2015 and 2019, according to IHS estimates, which should eventually mean global oil output will fall.

But production has been stubbornly high from Texas to Kuwait, leading some energy experts, like Ian Taylor, chief executive of the world's largest oil trader, Vitol Group PLC, to predict that even if oil prices rebound from their current lows to around $48 a barrel by year's end, they could languish between $40 and $60 for five to 10 years.

A palpable sense of pessimism hung over oil-company executives, traders and academics gathered in London over the past few days for International Petroleum Week, as concern is growing that the present crash will resemble the "lost decade" of low oil prices that began in 1985 and continued through much of the 1990s.

John England, vice chairman of energy for Deloitte LLP, is advising energy clients trying to stave off bankruptcy to go ahead and make the steep cost cuts they would have to if forced to declare. Many energy players are ruing their days of overspending, because their debt-loaded balance sheets and expensive-to-produce fields are poorly positioned to weather extended low prices.

"We know there will eventually be a rebound," Mr. England said. "The question is who's going to survive to see it?"

As many as one-third of American oil-and-gas producers could tip toward bankruptcy by mid-2017, but even if an array of U.S. shale companies file or their assets fall into new hands, new owners aren't likely to turn off the tap. Prices may have to fall as low as $20 a barrel for operators to completely shut in production, according to analyses by Goldman Sachs Group Inc. and Citigroup Inc.

As producers keep pumping, demand growth for fuels appears to be sharply decelerating, according to a new report from Simmons & Co. International, an energy investment bank in Houston. Profits from turning oil into gasoline and diesel have plummeted in recent weeks, so refiners aren't buying as much crude, further depressing the market, according to Howard Weil, a unit of Canada's Scotiabank.

Not much crude can fetch benchmark prices; a lot of it sells for less. Flint Hills Resources, which runs refineries in Minnesota and Texas, said Thursday it would pay $13.75 a barrel for light, sweet crude pumped in North Dakota.

Energy analysts at Barclays PLC predict that most publicly traded exploration companies will slash their spending this year by an average 50%, a move the investment bank hopes will take 1 million barrels of oil a day--about a 1% decline--out of the market, putting a floor under crude prices.

The oil bust has prompted job cuts of nearly 280,000 globally since the oil slump started in the summer of 2014, according to Graves & Co., a Houston consulting firm. In Texas alone, energy companies handed out an estimated 72,000 pink slips last year, said the Texas Alliance of Energy Producers. As those losses ripple through support services and other sectors where oil-and-gas workers spend money, the trade group says roughly 288,000 jobs could disappear statewide.

While the job cuts mounted, so did Texas oil production. The state's oil output increased 10% last year, compared with 2014, and may even surpass a state record set in 1972, said Karr Ingham, an economist for the Alliance. That is in part due to the fact that some heavily indebted companies need to keep pumping to generate immediate revenue, but also because hedging contracts allow some companies to sell much of their oil at prices that are higher than where crude currently trades.

Pioneer Natural Resources Co., one of the most prolific shale drillers in Texas, has such hedging contracts in place. Those contracts could be cashed in when Pioneer believes the oil market has bottomed out; proceeds could fund company operations during the oil price rebound. Scott Sheffield, Pioneer's chief executive, said he won't even consider cashing in those hedges because oil prices will probably fall further.

"I'm afraid it may go lower," he told investors Thursday.

Key players of the Organization of Petroleum Export Countries, including Saudi Arabia, have defended keeping their taps open and many now expect oil prices to stay low until 2020.

Patrick Pouyanné, chief executive of French oil giant Total SA, predicted oil prices will end 2016 higher than today , but declined to get specific.

"I am not going to even try," Mr. Pouyanné said. "Two years ago no one in this room would have forecast oil prices to be where they are today."

Chester Dawson contributed to this article.

Write to Erin Ailworth at Erin.Ailworth@wsj.com and Bradley Olson at Bradley.Olson@wsj.com

 

(END) Dow Jones Newswires

February 11, 2016 20:13 ET (01:13 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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