OPEC deal could pave way for oil firms to invest — if they’re brave
OPEC’S deal to cut production and boost prices gives oil companies the opportunity to shake off two years of layoffs and slumping profits to start investing again — if they still have the risk appetite.
Just ask Patrick Pouyanne, chief executive officer of Total. Throughout the downturn he’s consistently warned that tens of billions of dollars of investment cuts around the world will create an oil-supply shortfall within a few years. The situation presents an opportunity for the French producer and refiner, which will consider next year whether to start developing expensive new projects.
The question is, do wary investors really want him to put his money where his mouth is?
“Total must continue to allocate investments cautiously and bank on low oil prices,” said Ahmed Ben Salem, an analyst at Oddo Securities. The company should be seeking ways to drive production growth beyond 2020, but only on “projects with break-even of no more than $45 or $50, because the OPEC decision may be valid for just six months”, he added.
There’s no guarantee that Pouyanne is right. While his sentiments have been echoed by other influential figures in the industry such as International Energy Agency Executive Director Fatih Birol, Rex Tillerson, outgoing chief executive of energy giant Exxon Mobil and future US Secretary of State says there’s no looming supply gap.
What’s beyond doubt is that the two-year oil slump has prompted an unprecedented wave of retrenchment across the industry. The worst appears to be over after Brent crude, the international benchmark, gained more than 40pc this year. The rebound accelerated after the Organisation of Petroleum Exporting Countries agreed to the first production cuts in eight years.
Still, the price is about half its mid-2014 level and companies remain conservative — cutting spending in order to boost cash flow and protect dividends as debt rises. The biggest project approvals in recent months have focused on expanding existing facilities — BP’s Mad Dog Phase 2 in the Gulf of Mexico, Chevron’s Tengiz expansion in Kazakhstan — rather than tapping completely new areas.
Investors see plenty of reasons to be cautious, but they also acknowledge that anyone willing to invest now could reap the benefits later, particularly with the cost of developing new resources declining as suppliers cut their prices.