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.


US-China trade deal hopes grow as oil prices decline

Updated 19 June 2019
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US-China trade deal hopes grow as oil prices decline

  • Data suggested a smaller-than-expected fall in American crude inventories
  • Preparations underway for Donald Trump to meet Xi Jinping next week at the G20 summit in Osaka

LONDON: Oil prices declined on Wednesday as data suggested a smaller-than-expected fall in American crude inventories, as hopes for a US-China trade deal continue to grow.
Brent crude futures were down 51 cents at $61.72 a barrel.
US West Texas Intermediate crude fell 25 cents to $53.65 a barrel. On Tuesday, it had recorded its biggest daily rise since early January.
After weeks of swelling, US crude stocks fell by 812,000 barrels last week to 482 million, the American Petroleum Institute said on Tuesday, a smaller fall than the 1.1-million-barrel drop analysts had expected.
Official estimates on US crude stockpiles from the US government’s Energy Information Administration are due during afternoon trading.
US President Donald Trump offered some support, saying preparations were underway for him to meet Chinese President Xi Jinping next week at the G20 summit in Osaka, Japan, amid hopes a trade deal could be thrashed out between the two powers. Trump has repeatedly threatened China with tariffs since winning office in 2016.
European Central Bank President Mario Draghi also offered a boost, saying on Tuesday that he would ease policy again if inflation failed to accelerate.
Tensions remain high in the Middle East after last week’s tanker attacks. Fears of a confrontation between Iran and the US have mounted, with Washington blaming Tehran, which has denied any role.
Trump said he was prepared to take military action to stop Iran having a nuclear bomb but left open whether he would approve the use of force to protect Gulf oil supplies.
On Wednesday, oil markets shrugged off a rocket attack on a site in southern Iraq used by foreign oil companies.
“It is interesting to note that the crude oil futures market could not rally on hawks planting bombs in the Strait of Hormuz but could rally on doves planting quantitative easing,” Petromatrix’s Olivier Jakob said in a note.
“This is an oil market that doesn’t know how to react when an oil tanker blows up but knows how to react when the head of a central bank makes some noise.”
Members of the Organization of the Petroleum Exporting Countries have agreed to meet on July 1, followed by a meeting with non-OPEC allies on July 2, after weeks of wrangling over dates.
OPEC and its allies will discuss whether to extend a deal on cutting 1.2 million barrels per day of production that runs out this month.