In need of in­vest­ment

If in­vest­ment in new oil fields doesn’t show sig­nif­i­cant im­prove­ment in 2017, the sec­tor will bat­tle to meet global de­mand by 2020.

Finweek English Edition - - THE PESSIMIST’S GUIDE: OIL - By Lloyd Gedye ed­i­to­rial@fin­

the worst-case sce­nario for oil in 2017 is that the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries (Opec) doesn’t com­ply with the cut of 1.2m bar­rels a day an­nounced on 30 Novem­ber and that non-mem­ber coun­tries do not meet their com­mit­ment of cut­ting 558 000 bar­rels a day.

Opec knows this, which is why it de­scribed as “vi­tal” the need to get global oil stock to nor­mal lev­els. Richard Robin­son, in­vest­ment man­ager at Ash­bur­ton In­vest­ments, says that if the non-mem­ber cut does not ma­te­ri­alise and com­pli­ance from Opec sits at 67% rather than the norm of 85%, then oil in­ven­to­ries would not nor­malise un­til near the end of 2018 and the mar­kets could face sub-$50 per bar­rel oil prices for all of 2017.

Oil fell from over $100 per bar­rel in mid-2014 to less than $30 per bar­rel early in 2016, lead­ing pro­duc­ers to cut jobs and scale back on projects. This has in turn led to re­ports by the In­ter­na­tional En­ergy Agency (IEA) and Opec warn­ing that in­vest­ment in new oil fields is needed to pre­vent the sec­tor from dip­ping back into an un­der-sup­ply sce­nario.

They say that if new project ap­provals re­main low in 2017, the sec­tor will bat­tle to meet global de­mand by 2020.

Debt-laden oil in­dus­try

PwC’s Chris Bre­den­hann says there have been sig­nif­i­cant job cuts and capex re­duc­tions in the oil sec­tor, both in Africa and the rest of the world. Nige­ria and An­gola have been hit es­pe­cially hard.

“The oil com­pa­nies are tak­ing on ma­jor losses; there are high lev­els of debt in the in­dus­try,” says Bre­den­hann. Ac­cord­ing to him 80% to 90% of the oil com­pa­nies’ cash flow is go­ing to ser­vic­ing debt.

Bre­den­hann says Shell is still pay­ing out div­i­dends to its share­hold­ers, but it is bor­row­ing money to do that: “It’s go­ing to take a long time to work through.”

One knock-on ef­fect from low oil prices is that the cur­rent trend of de­clin­ing in­vest­ment in new oil projects will con­tinue. Shell has, for ex­am­ple, pulled out of the Arc­tic be­cause the re­sult­ing oil would have been too costly, while To­tal has halted in­vest­ment in Canada’s oil sands for sim­i­lar rea­sons. Africa Oil & Gas ad­vi­sory leader at PwC It takes be­tween three and six years to get con­ven­tional oil fields pro­duc­ing.

De­clin­ing in­vest­ment

In­vest­ment in the oil sec­tor peaked in 2014 at $780bn, but fell to $580bn in 2015 and is ex­pected to have fallen to $440bn in 2016. The IEA says ap­proval for new crude oil projects is at its low­est level since the 1950s.

The IEA be­lieves that $700bn needs to be in­vested ev­ery year and the oil price needs to rise to $80 per bar­rel in or­der for sup­ply and de­mand to be bal­anced by 2020.

Opec said in its most re­cent an­nual re­port that it is “vi­tal that the in­dus­try en­sures that a lack of in­vest­ments to­day does not lead to a short­age of sup­ply in the fu­ture”.

In its state­ment af­ter the 30 Novem­ber meet­ing, Opec again men­tioned the lack of in­vest­ment in the sec­tor.

It said it had noted the drop-off in in­vest­ment lev­els in 2015 and 2016 as well as the large num­ber of job lay­offs, and called for continued in­vest­ment.

“2017 is the last year where we will see a de­cent level of new oil hit­ting the mar­ket from large and mid-size off­shore projects,” says Robin­son. “From 2018 on­wards, there will be a vis­i­ble and sig­nif­i­cant drop in off­shore sup­ply. In fact, only 1.3bn bar­rels of new off­shore oil vol­umes have been sanc­tioned in 2016, com­pared to a yearly av­er­age of around 10bn be­tween 2010 and 2013.”

The Trump factor

An­other un­known factor that the oil sec­tor is go­ing to bat­tle with is the changes in US poli­cies un­der pres­i­dent-elect Don­ald Trump. Dur­ing the US elec­tion cam­paign, Trump promised pro­tec­tion­ist trade poli­cies and a fos­sil fuel re­vival. He said he was in favour of re­mov­ing oil sec­tor reg­u­la­tions and open­ing fed­eral land to drilling.

Whether he de­liv­ers on these cam­paign prom­ises will have their own com­pli­ca­tions for the oil sec­tor. Some an­a­lysts have sug­gested that in­creased pro­tec­tion­ist poli­cies in the US would be bad for Asia’s de­pen­dence on trade with the US, which could have neg­a­tive ef­fects on eco­nomic growth and oil de­mand.

The Opec head­quar­ters in Vi­enna, Aus­tria.

Chris Bre­den­hann

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