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ANALYSIS-Oil majors to keep investing to avoid past mistakes

Reuters UK

Fri Jan 30, 2009 5:43pm GMT

By Tom Bergin

LONDON, Jan 30 (Reuters) – Many oil companies are slashing investment in the face of a $100/barrel collapse in crude prices but, keen to avoid past mistakes and emerge as winners from the downturn, the very biggest are holding spending steady.

ConocoPhillips (COP.N), the United States’ third-largest oil company by market value said earlier this month it planned to slash its 2009 capital expenditure (capex) budget by 38 percent.

U.S. No.4 Occidental Petroleum (OXY.N) said on Thursday, it was slashing capex by 25 percent, while Russia’s fourth-largest oil producer, Gazprom Neft (SIBN.MM), said it could cut by 45 percent.

For a Factbox on companies’ capex, please double click on [ID:nLU85109]

In contrast, on Thursday, U.S. number 2, Chevron Corp (CVX.N) said it was holding capex steady and the world’s second-largest non-government controlled oil company, Royal Dutch Shell Plc (RDSa.L) said it would raise spending on projects by 5 percent in 2009.

“The bulk of companies are pulling back capex,” said Robin Batchelor, manager of the World Energy Fund at fund manager Blackrock.

“The supermajors like Royal Dutch are in a different position. Some of them will be able to take advantage of the situation,” he added.

“Supermajor” is the term applied to the five largest non-government controlled oil companies by market value. Exxon Mobil Corp (XOM.N) leads the club, followed by Shell, Chevron, Britain’s BP (BP.L) and France’s Total (TOTF.PA).

BP and Exxon have not yet disclosed their capex budgets for 2009. Total’s CEO said in a television interview last week that he planned to keep investments stable in volume terms, although he hoped lower industry costs will bring the value down.



The Supermajors’ spendthrift actions don’t make any sense at today’s oil price of around $42/bbl.

Most of today’s oil fields can turn a profit at $20/bbl crude and even the world’s most expensive oil, crude from Canada’s tar sands, can be extracted for around $40/bbl.

However, developing new projects requires much higher prices. BP CEO Tony Hayward said on Thursday that companies need oil prices of around $60-80 to encourage investment.

Part of the reason this level is needed is because the cost of extracting oil has doubled since 2004, Shell CEO Jeroen van der Veer said on Thursday.

Industry costs are expected to come down as demand for rigs, personnel and equipment dries up, and the Supermajors are delaying some projects to benefit from these expected drops.

Yet, in a world where companies are forced to search in ever deeper seas or harsher climates for oil, no one expects development costs to plunge to historic levels.

The Supermajors continue to invest because they can afford to take a long term view. Exxon set a corporate earnings record with net income of $45.2 billion for 2008 and Shell set a European record with earnings of $31.4 billion, while both Exxon and Chevron posted higher-than-expected quarterly earnings on Friday. [ID:nN30361802]

Strong cashflows mean the companies can meet big dividend payments and still bet on a future in which they believe energy costs will rise.

“(We are) in a world that is structurally short of energy,” Shell CEO Jeroen van der Veer said on Thursday.



The Supermajors have not always been so forward-looking.

“If you go back to the last oil price crash, the large companies cut back and essentially haven’t grown production since,” Stephen Thornber, Head of Global Oil Research at fund managers Threadneedle said.

Shell’s decision to double its capex in recent years was largely forced on it to counter falling production and reserves which were the result of earlier underinvestment.

Soaring crude prices since 2004 were fuelled by the sluggish production growth which followed the industry-wide cutbacks in capex after crude hit $10/bbl in 1998.

Yet, not everyone is convinced the Supermajors’ current robust approach to capex shows they have learnt the lesson of the last crash.

Shell’s decision to increase its capex reflected “fixed commitments”, Alexandre Weinberg, oil analyst at Petercam said in a research note.

The Supermajors’ tend to focus on large, complex projects which take years to construct so they have little flexibility in the short term to cut spending.

While an exploration company can cancel a drilling programme at little cost, a half-finished LNG terminal is a waste of billions of dollars of capital.

If oil remains low, the commitment of companies like Shell and Chevron to invest in new capacity may be tested.

“If it looked like oil was going to be in the forties into 2010, then we may see cuts in capex,” Thornber said. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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