After lean years, Big Oil is under pressure to spend

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 per cent 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.

Shell says the change will increase costs slightly but is convinced it will make its North Sea operations more cost effective and productive.

More generally, salaries across the oil and gas sector have edged up about 6 per cent so far in 2018 after declining in the previous three years, according to a survey published by Rigzone.

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.

“There is lots of pressure from all the units to get more money,” said an executive at a large European oil company.

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 longcycle investments given the persistent and accelerating base declines observed in global conventional and

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.

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 per cent in 2014 to 6 per cent in 2016. For the big oil firms, rates went from 1.5 per cent to just over 2 per cent 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, adding that increases would be cautious initially.

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.