It became a mantra, evidently coined last summer by BP CEO Bob Dudley, that oil prices will stay “lower for longer.”
More and more industry leaders are adopting that attitude because there simply doesn’t seem to be an end in sight of the problem, exacerbated by a price war waged by OPEC to make production less lucrative for its competitors and win back market share it began losing with the hydraulic fracking explosion that began several years ago in the United States.
The same attitude has been stated publicly by Ben van Beurden, the CEO of Royal Dutch Shell. And the only possible resolution, they say, is for demand to rise and for producers to cut output. With China’s economy slowing down, overall global demand is expected to remain flat for now, and no one expects OPEC, particularly its leading member, Saudi Arabia, to end the price war any time soon. Related: Oil Producers Here Are Now Getting Double The World Price
So it comes as no surprise that Eldar Saetre, the CEO of Norway’s state-run Statoil, is joining the chorus. Certainly, as recently as October, Saetre expressed some optimism that prices may stabilize. He noted then that twice in 2015, the price of a barrel of Brent crude had dipped to the mid-$40 range, then rebounded to around $50 per barrel.
Now, though, with the price of Brent in the mid-$30 range, a 12-year low, he seems to have given up hope of a genuine rally in the coming months. “[The price of oil] could go even lower, and it just underlines the uncertainty,” he told Bloomberg News in an interview in Oslo on Thursday. “We still have a situation with an imbalance in the market.” Related: Saudi Arabia Throws Down The Gauntlet, But To Whom?
Despite the impact on his company’s revenue, Saetre, like some other industry leaders, expresses some optimism that this very dearth of income could in itself lead to a rebound – perhaps a strong and lasting price recovery – because a lack of revenue leads oil companies to reduce investments, and this leads to lower production, restoring a measure of balance to the energy economy.
“It’s difficult to predict how the price will develop in the short term,” Saetre said in a separate interview with Reuters on Thursday. “There will probably be volatility and big swings. We firmly believe prices will rise because there is little new production capacity entering the market.”
He added, “I also believe that the longer it takes before the oil price rises, the more powerful that increase will become.” Related: Crude Hits New Lows Despite Geopolitical Unrest
As a result, he said, Statoil won’t tinker with its dividend policy. “We’re very clear that it has a long-term perspective in the same way that we operate our business and our financial governance, and the dividend policy isn’t linked to current oil prices,” Saetre said separately at a recent conference of Norway’s Confederation of Industry.
In other words, like other large energy companies, Statoil’s policy is to increase dividend payments proportionally to rises in earnings, but has chosen not to cut these payments even as revenues shrink. Despite its efforts to reduce spending, the company’s debt-to-capital radio had risen to 24 percent by the end of the third quarter of 2015, up from 19 percent at the end of the same quarter in 2014.
But even if that ratio rises, Saetre said, Statoil won’t resort to “desperate action” on dividend payments. “It’s something we can live with comfortably,” he said, “but we would then think a bit more about how to get the debt ratio down.”
Andy Tully of Oilprice.com
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