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.”