After lean years, Big Oil is under pressure to spend

Big oil is coming under pressure to boost investment. (Reuters)
Updated 03 October 2018
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After lean years, Big Oil is under pressure to spend

  • Higher investment needed to slow decline in reserves
  • Companies vowed to keep discipline after 2014 price crash

LONDON: Executives at the world's biggest oil and gas companies are under growing pressure to loosen the purse strings to replenish reserves, halt output declines and take advantage of a crude price rally after years of austerity.
With oil at a four-year high of $85 a barrel, exploration departments are urging company boards to drill more, wages are creeping higher, service companies say rates will have to rise and some investors say Big Oil must start growing again soon.
For the heads of companies such as BP, Chevron and Royal Dutch Shell who have pledged to stick to lower spending after slashing budgets by as much as 50 percent since 2014, the pressure may become hard to resist.
As in previous oil price cycles, there are concerns about the strength and duration of the business cycle, now in its 10th year of growth after the 2008 financial crisis.
Unlike previous oil price cycles, there is the prospect, eventually, of an end to growth in oil demand as the world shifts to cleaner energy.
But there are already signs some cost cuts implemented after oil slumped from $115 a barrel in 2014 to $26 in 2016 are being rolled back.
Shell, for example, said last month its teams in the UK North Sea will switch to a less tiring rota of two weeks offshore then three weeks onshore. During the austerity years, teams spent three weeks offshore then four onshore.
More frequent rotations mean more ships and helicopters will need to be chartered.
At one major firm, senior managers who had been meeting by video conference for several years are now getting flights approved for face-to-face gatherings, according to an executive at the company.
The boards of large oil firms are facing more internal requests to invest in new projects and acquisitions, and to beef up staff, according to senior executives present at such discussions.
New project approvals are picking up. Shell and its partners this week gave the green light to LNG Canada, one of the largest liquefied natural gas (LNG) projects in recent years.
"Shell's motivations for the project are clear: without this project, the company's upstream, LNG contract portfolio and LNG production was set to go into decline early next decade," Wood Mackenzie analyst Dulles Wang said.
Typically, after a period of lower capital spending, or capex, and low prices comes an era of rapid investment as oil recovers and supplies tighten.
During the lean years, companies cut back sharply. Now, they generate as much cash as in 2014 and are vowing to remain thrifty to focus on higher dividends, buying back shares and reducing debt. But in an industry where reserves and production decline naturally as oil is pumped from fields, continued investment is considered critical.
"We are likely in need of more long-cycle investments given the persistent and accelerating base declines observed in global conventional and offshore projects," said a source at in investment firm with large stakes in big oil companies.
Although some companies such as BP were able to stem production declines thanks to technology and lower costs, a drop in new production has taken a toll on the longer-term outlook for many companies.
Oilfield decline rates doubled from 3 percent in 2014 to 6 percent in 2016. For the big oil firms, rates went from 1.5 percent to just over 2 percent during the same period, according to Morgan Stanley.
"I expect capex rises due to a significant drop in reservoir life. Some capex will be used to reinvigorate existing wells," said Darren Sissons, partner at Campbell Lee & Ross Investment Management
Spending by the world's top seven oil companies is expected to rise to a combined $136 billion by 2020 from $105 billion in 2017, according to analysts at Morgan Stanley and Jefferies.
Starting from the middle of next year, boards will change their tone to prepare shareholders for higher spending from 2020, Morgan Stanley analyst Martijn Rats said.
"New project awards will likely already accelerate in 2019, but for major developments, capex in the first year tends to be limited. From 2020 onwards, capex is likely to go higher."
Patrick Pouyanne, chief executive of French oil company Total, conceded this week that while it aimed to stick to its spending range of $15 billion to $17 billion a year beyond 2020, capex could rise to $20 billion.
"Our view is that the majors' capex is probably 5 to 10 percent or so too low if they are to maintain their current reserve lives," said Jonathan Waghorn, co-manager of Guinness Asset Management's global energy fund.
The pressure to increase spending also comes at a time oil services companies are slowly increasing rates, saying their sacrifices to help Big Oil weather the slump should now be rewarded as crude prices rise.
"Current investment levels, particularly in the international market, are clearly not sustainable to meet either medium-term demand or long-term reserves replacement needs," Paal Kibsgaard, CEO of Schlumberger, the world's largest oil services provider, told a conference last month.
He said the international production base needed double-digit growth in investment for the foreseeable future just to keep production at current levels.
But investors and executives say reserve life - which was at its lowest in at least two decades in 2017 - is no longer the gold standard for measuring the health of oil companies.
A spending splurge could also eat into profits and revive fears oil companies are returning to the wasteful practices of the first half of the decade when crude prices soared.
"Historically, excess free cash flow above dividend cost has seen capex rise in the industry but the sector is trying to shake off the capital indiscipline tag and I believe they will stick to that," said Rohan Murphy, analyst at Allianz Global Investors.


Dubai property developer Damac on hunt for land in Saudi Arabia

Hussain Sajwani
Updated 18 March 2019
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Dubai property developer Damac on hunt for land in Saudi Arabia

  • Brexit a “concern” for UK property market says Sajwani
  • Developer mulls investing “up to £500 million” on London project

LONDON: The Dubai-listed developer Damac says it is scouting for additional plots of land in Saudi Arabia, both in established cities and the Kingdom’s emerging giga-projects such as Neom.
Hussain Sajwani, chairman of Damac Properties, also said the company would look to invest up to £500 million ($660 million) on a second development in the UK, and that it is on track to deliver a record 7,000 or more units this year.
Amid a slowing property market in Dubai, Damac’s base, the developer is eying Saudi Arabia as a potential ground for expansion for its high-spec residential projects.
Damac has one development in Jeddah, and a twin-tower project in Riyadh — and Sajwani said it is looking for additional plots in the Kingdom.
“It’s a big market. It is changing, it is opening up, so we see a potential there … We are looking,” he said.
“In the Middle East, Saudi Arabia is the biggest economy … They have some very ambitious projects, like the Neom city and other large projects. We’re watching those and studying them very carefully.”
The $500 billion Neom project, which was announced in 2017, is set to be a huge economic zone with residential, commercial and tourist facilities on the Red Sea coast.
Sajwani said doing business in Saudi Arabia was “a bit more difficult or complicated” that the UAE, but said the country is opening up, citing moves to allow women to drive and reopen cinemas.
He was speaking to Arab News in Damac’s London sales office, opposite the Harrods department store in Knightsbridge. The office, kitted out in plush Versace furnishings, is selling units at Damac’s first development in the UK, the Damac Tower Nine Elms London.
The 50-storey development is in a new urban district south of the River Thames, which is also home to the US Embassy and the famous Battersea Power Station, which is being redeveloped as a residential and commercial property.
Work on Damac's tower is underway and is due to complete in late 2020 or early 2021, Sajwani said.
“We have sold more than 60 percent of the project,” he said. “It’s very mixed, we have (buyers) from the UK, from Asia, the Middle East.”
Damac’s first London project was launched in 2015, the year before the referendum on the UK exiting the EU — the result of which has had a knock-on effect on the London property market.
“Definitely Brexit has cause a lot of concern, people are not clear where the situation will go. Overall, the market has suffered because of Brexit,” Sajwani said.
“It’s going to be difficult for the coming two years at least … unless (the UK decides) to stay in the EU.”
Despite the ongoing uncertainty over Brexit, Sajwani said Damac was looking for additional plots of land in London, both in the “golden triangle” — the pricey areas of Mayfair, Belgravia and Knightsbridge, which are popular with Gulf investors — and new residential districts like Nine Elms.
Sajwani is considering an investment of “up to £500 million” on a new project in the UK capital.
“We are looking aggressively, and spending a lot of time … finding other opportunities,” he said. “Our appetite for London is there.”
Damac is also considering other international property markets for expansion, including parts of Europe and North American cities like Toronto, Boston, New York and Miami, Sajwani said.
The international drive by Damac comes, however, amid a tough property market in the developer’s home market of Dubai.
Damac in February reported that its 2018 profits fell by nearly 60 percent, with its fourth-quarter profit tumbling by 87 percent, according to Reuters calculations.
Sajwani — whose company attracted headlines for its partnership with the Trump Organization for two golf courses in Dubai — does not see any immediate recovery in the emirate’s property market, or Damac’s financial results.
“(With) the market being soft, prices being under pressure, we are part of the market — we are not going to do better than last year,” he said. “This year and next year are going to be difficult years. But it’s a great opportunity for the buyers.”
But the developer said Dubai was “very strong fundamentally,” citing factors like its advanced infrastructure, safety and security, and low taxes.
In 2018, Damac delivered over 4,100 units — a record for the company — and this year, despite the difficult market, it plans to hand over even more.
“We’re expecting north of 7,000,” Sajwani said. “This year will be another record.”