As OPEC meets to lift output, big oil firms are holding back

Western oil firms retrench despite rising prices, many say it threatens longer-term supply crunch

LONDON— For the past two years, big oil-exporting nations reigned in production to boost prices.

But rather than responding with fresh investment, Western oil companies have retrenched, a move many now say threatens a longer-term supply crunch.

As oil executives descend on Vienna this week, members of the Organization of the Petroleum Exporting Countries, Russia and other big producers promise to reverse their strategy and pump more now that prices have climbed. Their decision could have a big effect on short-term oil prices and prices at the gasoline pump.

But further out, industry spending on new oil fields will have a more lasting impact on both supply and prices.

Since oil prices crashed in 2014, the world’s biggest publicly listed Western oil companies have slashed their capital spending by roughly 40%, according to data from Jefferies, the investment bank.

While prices have climbed more than 10% this year—flirting with their highest level since 2014 last month—executives at big oil firms have largely vowed to keep a tight lid on spending.

“We’re going to maintain the capital discipline,” BP PLC Chief Executive Bob Dudley said this month.

The companies, also including Chevron Corp. and Royal Dutch Shell, are moving cautiously under pressure from investors, who were burned by big budgets and poor returns when prices were high. Instead of spending on new projects, these companies are paying down debt and generating cash for those skeptical investors, with buybacks or higher dividends.

But without fresh spending on new oil production, the world could slip into a supply crunch after 2020, the International Energy Agency has warned. The sector needs to raise its spending by a third just to maintain production at current levels in the coming years, according to Wood Mackenzie, an oil-focused consultancy.

“The industry isn’t spending enough to sustain itself,” said Angus Rodger, a Wood Mackenzie research director.

There are short-term risks, too, executives and analysts say. Forecasts for oil demand are rising.

Today’s cushion of oil stored in inventories—which protects consumers from price shocks— is the lowest in years. Fields that showed early promise can deplete faster than expected. Geopolitical events in Venezuela, Iran and Libya have also cut into supply.

“If we get a surprise in terms of decline rates or demand, there’s a chance we’ll see a significantly tighter market,” said Eirik Waerness, chief economist at Norwegian energy giant Equinor ASA, formerly called Statoil.

“The price reaction could be very strong.”

Despite the spending cuts, production continues to grow for now among big companies in part due to investment from years past. Jefferies estimates the world’s biggest publicly listed Western oil companies will increase their output roughly 10% by the end of the decade, compared with last year.

And while budgets remain capped, companies are beginning to approve new projects again, taking advantage of substantial success in lowering costs. Nonpublic companies, including the state-owned firms that pump OPEC crude, have also promised they will continue to pour money into developing fields.

Last year, 32 major new developments got the go-ahead, and 16 have been approved so far this year, according to Wood Mackenzie. Many of those new projects, though, are natural gas, rather than oil. Companies are also shifting their spending focus from long-term projects to shorter-cycle shale developments that deliver faster returns.

“We have a possible future of crisis,” OPEC Secretary General Mohammad Barkindo warned at an industry conference in March. “The global industry needs to focus on the threat of underinvestment.”