As the Organisation of Petroleum Exporting Countries (Opec) is debating production cuts to lift oil prices, the Big Oil is reining in capital investment for a longer period to stay afloat in a market brought down by the global glut. The biggest international oil companies will probably cut investment spending about $370bn this year and next, according to Wood MacKenzie.
Benchmark Brent crude plunged from more than $115 a barrel in June 2014 to less than $28 in January this year. Prices have since recovered to cross $50.
Eni is reducing capital expenditure at least through next year, CEO Claudio Descalzi said in Abu Dhabi on Monday. BP is holding outlays to about $16bn this year, according to CEO Bob Dudley. ExxonMobil chief Rex Tillerson, while declining to give an estimate of his company’s expenditure, said spending will be “highly variable” from one producer to the next.
Energy investment is estimated to be 44% lower than expected from 2015 to 2020, compared with expectations before crude prices collapsed about two years ago. It would mean a 3% reduction this year in oil and natural gas production, equivalent to 5mn barrels of oil, and another 4%, or 6mn barrels, in 2017, according to Jessica Brewer, a Middle East analyst for WoodMac.
The International Energy Agency estimated in March spending in exploration and production fell 25% in 2015 and will decline by the same amount this year, cutting more than $300bn in investment. It sees no signs companies will resume spending in 2017.
The result? An oil shock of supply shortage by 2020, according to Total CEO Patrick Pouyanne. The UAE last week warned that the “massive” number of projects being delayed could create a future oil shortage.
Not everyone is that pessimistic, though. “We think investment will be growing rather than falling,’’ Ed Morse, head of commodities research at Citigroup, said last week. The bank sees the Brent rising to $60 in the third quarter next year and to $65 in the following quarter, enough to spur spending.
A lot has happened since Goldman Sachs made the forecast of oil sinking to $20 (some doomsday views went as low as $10) in January. While few analysts expect prices to return to the wishful $100 level, it all now boils down to Opec, which is leading the effort to prop up prices. The group remains committed to an agreement reached last month in Algiers to trim output, its secretary general Mohamed Barkindo said in Abu Dhabi.
Co-operation from non-Opec producers is a prerequisite to bring the oil market back into balance. Russia, the world’s largest energy producer which pumped at a post-Soviet record of 11.2mn bpd last month, is “on board,” Barkindo said. Any output deal would also require a solution to the “sticking point” of exemption demanded by Opec members Iraq and Iran.
No oil output deal in Vienna on November 30? Prices could plunge to the low-$40s, warns Goldman Sachs Group.