Big Oil—and its smaller competitors—attracted a lot of praise for their tight financial discipline during the last three years, after Brent collapsed from more than US$100 a barrel to less than US$30 in less than 24 months. Some actually thought this may be the new normal: financial discipline, tight belts, and careful scrutiny of any new projects. Reality seems to have proven them wrong.
Reuters reported this week that big oil companies’ boards are under increasing pressure to boost spending, expand production, and increase reserves. That’s just three years after everyone in oil woke up to the fact that Brent was going nowhere but down for a while longer and belts started tightening. Now, with Brent at US$85 and climbing, these belts are getting too tight, it seems. Despite pledges made by the chief executive officers of the biggest oil companies in the world, the strict financial discipline they had imposed during the rough years might now have to be relaxed.
Reuters quoted sources from the sector that said various departments within them were asking for more money, videoconferencing was being replaced by face-to-face meetings, which are costlier because of travel expenses, and offshore platform rotas are being shortened, which raises logistics costs. All this suggests Big Oil is relaxing and is ready to start spending more again.
Moody’s in July said in a note to clients the five biggest oil companies would spend 5 percent more in 2019 than in the current year. The ratings agency, whose note Forbes’ Gaurav Sharma quoted in a July story, said higher oil prices were helping Big Oil report more substantial profits and these profits, in turn, were spurring a more upbeat attitude towards higher expenditure.
Does this sound familiar? It must, because that’s how all oil cycles have worked. Hopes—and assurances from the industry—that this time everything will be different may very well have been premature and overoptimistic. Reuters’ John Kemp put it succinctly in a commentary from April: “The oil industry has been characterised by deep and prolonged boom-bust cycles since the first modern well was drilled in 1859. Deep cycles are the natural condition of the oil industry and there is no reason to think the future will be any different.” Related: Is China Turning Trump's Oil Weapon Against Him?
The oil industry cannot escape from its cyclical nature no matter how many mistakes it learns from, but there are two areas that really do require higher spending and there are doubts that Big Oil will be able to provide it, regardless of the current oil price rally. These two are reserve replacement and climate change.
Reuters reported in its story that the oil field decline rate accelerated from 3 percent in 2014 to 6 percent in 2016. Sure, spending cuts had something to do with this, but there is also such a thing as natural depletion that has nothing to do with spending: finite resources. So, higher spending to ensure stable production in spite of the doomsayers eager to usher in a totally renewable era in energy is inevitable.
Yet, higher spending on cleaner energy is also inevitable: Big Oil has been increasingly vocal about its commitments to the world of tomorrow where oil and gas will be a much smaller part of the energy mix. To live up to their promise, these companies will need to spend twice as much on “new energy” as they are spending now, Morgan Stanley warned in a report from last month cited by Bloomberg. In this context, it would be safe to say that Big Oil is entering the next stage of the new cycle and it will be spending more in the coming years. Until the next price drop, that is.
By Irina Slav for Oilprice.com
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