Analysis: Big Oil keeps spending drag even with a gross rally windfall


  • Companies consider the challenge of long-term energy transition
  • Investors remain focused on short-term returns
  • Spending could increase next year if oil recovery continues

LONDON, July 12 (Reuters) – Major international energy companies resist temptation to rush in and spend an unexpected windfall from rising oil and gas prices as they focus on the challenges of transition longer term, said executives and analysts.

Benchmark crude oil prices more than doubled in the second quarter of 2021 from a year earlier and rose further in recent weeks to nearly $ 78 a barrel, their highest level in nearly three years, the OPEC and other large producers who failed to strike a deal to lift production.

That, coupled with rising global natural gas prices due to supply issues, will increase oil company coffers after companies like Exxon Mobil (XOM.N), Royal Dutch Shell (RDSa.L) and BP ( BP.L) have significantly reduced their costs. following the coronavirus pandemic last year.

“The majors’ cash flow looks very strong, they are definitely pulling on the oil and gas cylinders,” Redburn analyst Stuart Joyner said, adding that things could improve further once demand for refined products would make a full recovery.

Companies are expected to provide updates on their spending plans in second quarter earnings reports in the coming weeks, but they are unlikely to change course with investors focused on securing higher returns. sector after a disappointing decade. (Graphic: Big Oil spending)

While executives of major energy companies said last month that oil at $ 100 a barrel was achievable again in the coming years, they added that prices would be volatile, which means that there is little time to come. ‘incentive, at least for now, to commit billions to projects that may take some time. decade or more to show ROI. Read more

The enormous uncertainty regarding energy demand in the short term due to the resurgence of COVID-19 in parts of the world and in the longer term with the shift to low carbon fuels to combat climate change is holding back also the bullish mood.

“International oil companies are still rebuilding their balance sheets,” Brian Gilvary, CEO of the oil and gas division of INEOS INEOS Energy and former CFO of BP, told Reuters.

Shell announced last week that it would increase shareholder returns sooner than expected through higher revenues, keeping its annual capital spending at no more than $ 22 billion. Read more

TRANSITION BREAK

For companies such as BP and Shell, the French TotalEnergies (TTEF.PA) and the Spanish Repsol (REP.MC), the coronavirus crisis has already accelerated the deployment of new strategies aimed at reducing carbon emissions and developing renewable energy companies.

So, unlike previous cycles where rising oil prices have loosened the purse strings, policymakers will likely stick to their spending discipline and focus on their energy transition strategies.

“Rising oil prices allow us to extract more value from our existing operations, which in turn will generate more resources for our transformation spending in line with our energy transition roadmap,” Reuters told Reuters Josu Jon Imaz, Managing Director of Repsol.

BP will stick to its plan to cut oil production by 40%, or about 1 million barrels per day, by 2030, including through the sale of oil and gas assets, CEO Bernard Looney said at the Reuters Energy Transition conference last month.

“High oil prices are very positive for our strategy,” Looney said. “These assets that we are selling will be in a much higher price environment, potentially, and therefore generate more revenue.”

A surge in commodity prices in the late 2000s pushed oil prices to record highs above $ 140 a barrel and sparked a wave of investment, especially in huge, complex water-based oil fields. deep, giant gas liquefaction plants and an American shale drilling boom that has shaken up oil supplies.

Capital spending by the majors is expected to increase slightly from next year as companies pay off debts and fully recover from the pandemic, Redburn’s Joyner said.

“There will be more investment, but a lot of the increase will go upstream (oil and gas production), it will go into renewables.”

U.S. shale producers have also promised investors that they will limit spending in 2021. read more

In contrast, small international oil and gas drillers are expected to slowly increase spending in response to rising prices, said INEOS Energy’s Gilvary.

“Smaller exploration and production companies will increase their spending, but in a more measured way, as they tend to focus more on the short to medium term.”

Reporting by Ron Bousso; Editing by Kirsten Donovan

Our standards: Thomson Reuters Trust Principles.


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