Daily Management Review

Spending Revival Signaled by Big Oil’s $45 Billion of New Projects


Spending Revival Signaled by Big Oil’s $45 Billion of New Projects
Emboldened by rising crude prices and low costs that promise to trigger more expansion ahead, the world’s largest oil companies are regaining the confidence to make big investments which was displayed by two projects worth $45 billion that were announced this month.
In what is tipped as the industry’s biggest undertaking since crude started tumbling two years ago, Bottom of Form

Chevron Corp. gave the go-ahead to a $37 billion expansion in Kazakhstan. On the other hand expansion of a liquefied natural gas plant in Indonesia worth $8 billion was approved by BP Plc.
BP’s Mad Dog Phase 2 in the Gulf of Mexico and Eni SpA’s Coral LNG development off Mozambique are the two additional big projects in the industry that are likely to get a green light this year, according to industry consulting firm Wood Mackenzie Ltd. and Jefferies International Ltd.
After cutting more than $1 trillion in planned investment amid sinking earnings, executives have been emboldened to start spending again after crude’s recovery from a 12-year low and a decline in project expenses. Explorers need to at least begin a new phase of investment in exploration and production to ensure future growth even as protecting balance sheets is important.
“We have seen a recent pick-up, demonstrating that projects deemed strategically important are still going ahead,” said Angus Rodger, a Singapore-based principal analyst for upstream research at Wood Mackenzie. Although still well below the annual average of 40 before oil crashed, he expects about 10 decisions on midsize to large projects this year from fewer than 10 last year.
Costs of services and equipment, including rigs have been driven by the price slump even though it hit profit hard. As reduced demand creates a buyers’ market, drillers have renegotiated contracts to get better deals from suppliers.
Half the cost off its Mad Dog Phase 2 project has been knocked off by BP. Chief Executive Officer Bob Dudley said last month that it’s now expected to cost less than $9 billion while it was estimated at $20 billion four years ago. He said that while low steel prices are reducing the cost of other equipment, rig-rental rates are likely to stay down because of an oversupply.
Jason Gammel, a London-based analyst with Jefferies says that Chevron’s and BP’s investment decisions “are a signal that they’re more confident of their ability to pay their dividend”.
“It’s showing more confidence” in cash flows, he adds.
Companies faced a choice between protecting dividends and cutting investment as earnings fell. Canceling projects and firing thousands of people, the biggest opted to protect payouts. bosses including Ben Van Beurden of Royal Dutch Shell Plc said they were doing what shareholders wanted even though some analysts criticized that strategy.
“Big Oil is still going to be conservative in their spending. Those days of several of these big projects going on at the same time are in the past,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, Missouri.
Crude’s recent rise is unlikely to last as demand growth slows, believe some, including Ian Taylor, CEO of Vitol Group, the world’s largest independent oil-trading house. Brent also climbed in the first half of 2015 before sliding more than 40 percent by year-end. 

Rather than something built from scratch, Chevron’s and BP’s plans are for expansions of existing projects. Brendan Warn, a managing director at BMO Capital Markets in London said that since such projects maximize existing infrastructure, they are easier to push through.  
“Unless oil prices do something very drastic and go lower, these companies now have many projects in their portfolios to pick from. Times have improved.” said Iain Armstrong, a London-based analyst at Brewin Dolphin Ltd.

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