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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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Big Oil Ready To Start Spending Again

Large oil and gas companies seem to be looking at new opportunities to invest, to capitalize on the future growth in oil demand. The confidence to invest in operations with a long-term approach suggests they are convinced that the worst is over and that they can loosen their purse strings, reports Nasdaq, citing the Wall Street Journal.

This is evident in the number of large projects undertaken by the energy companies this year, the largest to date being Chevron’s announcement of a $37 billion fresh investment to expand the output at Tengiz oilfield in Kazakhstan.

According to Houston energy investment bank Tudor Pickering Holt & Co., energy companies have so far invested in eight large energy projects in 2016, compared to only four such major projects in 2015.

"It's a terrific time to be making this sort of investment," said Todd Levy, Chevron's president for exploration and production in Europe, Eurasia, and the Middle East.

The Chevron news signals a major change in sentiment, since at the start of the year oil companies were keen on conserving cash rather than deploying for new projects. Until the end of 2015, $380 billion of capital spending was put on hold, according to research and consultancy firm Wood MacKenzie. The stalling of expenditures affected the future extraction of 27 billion barrels of oil over several years. Related: Amazon’s New Bizzare HQ Pushes Clean Tech Boundaries

However, a couple of months after oil prices hit a multi-year low below $30 per barrel, a sharp rally ensued pushing prices higher to the $50 per barrel mark. The recent supply outages also reminded investors of the delicate balance in the oil industry. Within a matter of a few weeks, the supply glut tipped over to a supply deficit.

The aggressive cost-cutting has reduced the operating costs of many companies to such an extent that at $50 per barrel, they are able to generate a profit. With the outlook for the second half of this year and next year improving, companies are again focusing on the long-term.

The new investments in the Tengiz project, which is operated by a consortium comprising of Chevron, Exxon, Lukoil, and Kazakhstan’s state oil company KazMunaiGaz, will bear fruit only in 2022, when the first oil from it will flow into the market.

"It shows that the companies are at a point where they can consider investing in longer-term projects," said Jason Gammel, senior oil analyst at Jefferies.

Mr. Gammel called the Chevron announcement "an inflection point," as this is the first significant announcement in 2016 worth more than $10 billion.

Tudor Pickering believes BP's deep-water project in the Gulf of Mexico known as Mad Dog II and Eni's Coral floating liquefied-natural-gas development in Mozambique are also likely to see progress this year. Related: Oil Drillers On Thin Ice As Banks Tighten Credit

Along with devoting large sums to conventional projects, the big four are also looking for opportunities in the U.S. shale patch, which requires lower upfront investment to commence production. However, shale wells have a short life compared to the large projects, which continue for many decades.

Nevertheless, the big oil companies are cautious as shale producers are adding rigs expecting higher prices. The shale oil drillers also have a large number of drilled wells at their disposal, which are ready for fracking. If prices rise further, it can lead to an increase in the American production, putting a lid on oil prices.

If oil prices don’t drop significantly from current levels, the new investments by the majors will turn out to be a wise decision, however, if prices drop, the current announcement can put a strain on their balance sheet.

By Rakesh Upadhyay for Oilprice.com

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