Oil hits sweet spot

Published Jan 11, 2017

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London - Big Oil

is poised to reap rewards this year as investments made before the crude-price

slump pay off just as the recovery starts.

Seven of the

world’s largest energy companies will together boost oil and natural gas output

by 398 000 barrels a day, the most since 2010, according to data from Oslo-based

consultant Rystad Energy. In 2018, output will rise even faster.

The oil majors

aren’t increasing their drilling budgets. Instead they’re benefiting from money

invested before the rout. Lower costs combined with higher output would allow

companies including Exxon Mobil Corp. and Royal Dutch Shell to maximise their

gains from improved oil prices. Should crude remain above $50 a barrel, 2017

could be a break-out year, eliminating the need to borrow to pay

dividends, according to analysts at Sanford C. Bernstein.

“They could hit

a sweet spot this year,” said Mark Tabrett, a London-based analyst at

Bernstein. “Heavy investments of previous years are paying off with more

production, costs have been cut and the companies are in a position to take

advantage of that when oil prices rise.”

After reaching

an intraday low of $27.10 a barrel on Jan. 20, Brent oil prices more than

doubled to a high of $57.89 on December 12. Futures traded Wednesday at $53.85

a barrel, up 0.4 percent, as of 7:22 a.m. London time. The global benchmark

rose 52 percent last year, its biggest yearly gain since 2009. Shares in the

majors, meanwhile, rose across the board, led by Shell, whose B shares gained

53 percent in London, the best annual increase since at least 1990.

Read also:  Oil halts gains near $54

Brent averaged

about $45 a barrel in 2016, and is expected to rise above $55 this year,

according to the median of 45 analyst estimates compiled by Bloomberg. Yet the

majors, still smarting from more than two years of depressed prices, have

expressed a reluctance to increase spending.

“For us this will

be about not starting to run too fast,” Statoil CEO Eldar Saetre said at a

conference in Oslo last week. “There won’t be a lot of new activity initiated

when it comes to larger projects in 2017.”

2020 problem

Rystad estimates

that the seven companies will boost output by about 670,000 barrels a day next

year. Still, years of under-investment during the time when oil prices were low

mean the production gains may be short lived.

“Output should

start declining eventually for the majors that slowed

project-sanctioning,” said Rob West, an analyst at Redburn (Europe),

a London-based equity broker. “Field-by-field models suggest that’s a

problem for 2020.”

Much of the

expected increase is coming from offshore oil and gas projects approved at the

start of the decade, said Espen Erlingsen, vice-president for analysis at

Rystad. They’re the kind of mammoth projects that are difficult to shut down

once they get going.

Included is

Chevron Corp.’s Gorgon liquefied natural gas project in Australia, which partly

resumed operations last week, and Kazakhstan’s Kashagan field, in which Eni

SpA, Exxon, Shell, and Total SA all have stakes, which began producing last

year. Eni expects oil and gas production to climb to a record in 2017 even

as spending continues to fall.

A plan by the

Organization of Petroleum Exporting Countries and 11 other nations to curb

their supply and boost prices won’t stand in the way of these companies’ growth

plans, Redburn’s West said.

While they all

have production in OPEC countries, “the cuts are mostly concentrated outside of

the majors’ portfolios, or cover assets that were declining anyway,” he said.

“The majors are

now starting to harvest from the investments they did at the beginning of this

decade,” Erlingsen said. “Production is expected to grow, while investments are

falling.”

BLOOMBERG

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