Chevron Corporation (CVX) announced its capital spending program for 2010 this morning. The $21.6 billion total reflects a decrease of 5% from the 2009 capex budget.

Last week, ConocoPhillips (COP) announced a 10% drop in capital spending for 2010, from $12.5 billion in 2009 to $11 billion. Conoco also plans the sale of some $10 billion in assets over the next couple of years. At the same time that Conoco announced these measures, the company raised its dividend to $0.50/share.
The lion’s share, about 80%, of oil company capital budgets go toward exploration, production and reserve replacement. This is, after all, where the money is for oil producers.

Outlook for Energy Producers in 2010 Looks Grim

Industry-wide, capital spending tends to fall following a price spike such as the spike in crude oil in 2007-2008. The price rises, if they are big enough, lead to a downturn in the economy, which in turn causes the oil companies (and just about everyone else) to cut spending and begin conserving cash.

It’s worth noting that oil companies probably do not want to see crude prices rise to the levels of summer 2008. There’s little question that those prices contributed to the economic woes that followed. That’s not a scenario producers want to repeat.

For big oil companies, this reaction can lead to some serious consequences. Most important is a company’s ability to replace its production. This is especially difficult as more and more of the resources have come under the control of national governments.

Rising costs and very long development timeframes add to the financial challenges facing oil companies. National oil companies, like China’s Sinopec (SNP) or PetroChina (PTR), have a definite advantage in today’s big-money E&P business. Exxon Mobil (XOM) CEO Rex Tillerson has noted the difficulty of competing with the Chinese for drilling rights.

According to Barclays Capital, about 48% of oil companies expect capital spending in 2010 to range from flat to down, while the rest expect to spend more. More than 30% of companies surveyed expect to increase capital spending by 20% or more.

A lot depends on an overall recovery in the global economy. If the signs of a recovery get stronger, oil company spending will increase. Likewise, if economic activity begins to droop, expect oil producers to rein in their spending.

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