Is Big Oil making a comeback?
After three years of pain, oil chiefs are rubbing their hands at rising prices, which they hope will deliver another golden era.
After a three-year plunge in prices that forced companies such as Shell, Chevron and BP to cut jobs, cancel projects, sell assets and load up on billions of dollars of debt, the oil industry is finally emerging from its funk.
With crude prices nudging $US60 a barrel — more than double the low point of $US27 touched early last year — the bigshots arriving in London this week for the Oil & Money conference, one of the industry’s swankiest annual shindigs, looked quietly confident that they had seen off the worst of a historic industry downturn.
“The swimming pools are draining,” Bob Dudley, the BP chief, quipped cheerfully as he and others at the meeting eyed signs of a tightening market.
Are they right? Certainly, after the slim pickings of the past three years, oil producers are expected to unveil sharply improved third-quarter results this month, with a surge in profits likely to delight investors.
The best, however, may be yet to come. That’s because the big drop in exploration and production activity between 2014-16 triggered a dramatic fall in the cost of those projects that remained on track, as the price of drilling rigs, steel and other services collapsed.
While smaller producers struggled to simply stay in business, bigger oil companies with the financial strength to survive were well placed to take advantage of the situation by locking in good projects at sharply lower costs.
BP is a good example. As the industry battled with slumping prices, the company kept on investing through the downturn. From western Australia to Trinidad and from Egypt to the Gulf of Mexico, it has continued to channel billions of dollars into about 15 mega-projects that are now starting to bear fruit. Seven of these are due to start production this year, with a similar number expected to ramp up by 2020. Together, they should add about 800,000 barrels to BP’s daily output.
The company has enjoyed some juicy cost savings, too. The price tag for the completion of a giant liquefied natural gas project at Tangguh in Indonesia, for example, was hacked back from an original estimate of $US12 billion to $US8 billion when it was signed last year.
All of this means that big oil producers are hopeful they are entering a “harvest” mode, the industry’s cherished sweet-spot when billions of dollars of sunk capital investment starts to generate cashflow and fat profits. After three years of pain, oil men and women are rubbing their hands at rising prices, which they hope will deliver another golden era.
They shouldn’t relax yet, however. For one thing, it’s far from clear how much higher oil prices will travel as the industry recovers and a wave of new production comes on stream. The recovery of the US shale industry, in particular, poses a threat. Prices are being steered higher, too, by a fragile agreement between OPEC, Russia and other exporters that could yet unravel. Moreover, as the industry emerges from the gloom, it is also blinking at new challenges, such as the steady rise of electric vehicles, which promise to undermine oil demand, especially in key growth markets such as China.
Despite the election of President Donald Trump last year, international pressure to take concerted action on climate change is growing, throwing down the gauntlet for companies to prioritise investments in either gas or alternative energy over crude oil. At the same time, chief executives will need to walk a fine line meeting these demands while satisfying their investors’ hunger for more short-term dividend growth.
Although some are trying, oil companies will need to work harder to establish new business models to take advantage of these trends if the good times are truly to roll again.
The Times
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