By Selina Williams in London and Bradley Olson in Houston
There are signs the deep freeze in oil-industry spending is
beginning to thaw.
Chevron Corp., Exxon Mobil Corp. and several partners on Tuesday
committed $37 billion to expand an oil project in Kazakhstan known
as Tengiz, one of the biggest investments since crude prices
collapsed two years ago.
Last week, BP PLC gave the green light to a multibillion-dollar
gas export expansion complex. It follows the U.K. oil giant's
announcement in June that it is fast-tracking a major offshore gas
discovery in Egypt. Italy's Eni SpA is moving ahead on an Egypt
field as well.
In choosing to invest now, the world's biggest energy companies
get to benefit from a huge drop in drilling costs that has
accompanied the oil-price fall. Pumps, valves, drilling rigs,
construction and engineering services, steel and even labor are
cheaper because the contractors that provided those services have
less work than in the boom years after the financial crisis when
oil prices traded around $100 a barrel.
The recent wave of investments may point to confidence in an
oil-price recovery -- after they collapsed from around $115 a
barrel in mid-2014 to a low of $27 in January -- but it is still
early days.
Big-energy company executives have said they are treating the
oil-price rally with caution, warning that as prices rise,
investment could kick in from U.S. shale producers and American
output could quickly ramp up again. Just on Tuesday, U.S. crude
prices dropped almost 5% to $46.60 as traders worried about an
uptick in U.S. drilling activity.
A similar price rally last year had quickly fizzled. Since oil
prices started collapsing in the summer of 2014, companies have
delayed or canceled about $270 billion in projects through March,
including expensive Arctic developments, according to Rystad
Energy. Great Britain's vote to leave the European Union adds
another level of uncertainty, with the effect on markets, oil
demand and investment still to be determined.
But the Chevron announcement on Tuesday is "an inflection
point," said Jefferies senior oil analyst Jason Gammel, noting that
it is the first investment of more than $10 billion this year.
Tengiz is already one of the most profitable projects in the
past 40 years. "It's a terrific time to be making this sort of
investment," said Todd Levy, Chevron's president for exploration
and production in Europe, Eurasia and the Middle East. Chevron is
the project's operator.
Since the start of 2015, Chevron and other big oil firms have
slashed their budgets by a quarter -- exceeding $30 billion overall
-- and cut more than 30,000 jobs to endure a prolonged period of
low prices.
That has forced them to scour the globe for opportunities that
meet a very narrow set of criteria: They have to boost production
in the years ahead so the companies avoid shrinking, and they have
to be profitable at $50 oil.
Since prices began falling, they haven't often been able to find
such a sweet spot. Last year, Western oil companies approved just
four such major projects, including in the Gulf of Mexico, Norway,
Egypt and Ghana. So far in 2016, energy companies have taken the
plunge on eight big expensive developments, according to Houston
energy investment bank Tudor Pickering Holt & Co. And more are
expected this year, the bank said.
Still, these won't come online for years. The first oil from the
Tengiz expansion, for instance, won't come until 2022.
Exxon, Chevron, Royal Dutch Shell PLC and BP are turning to U.S.
shale wells as well. Those operations require less upfront
investment to begin producing but also don't approach the scale or
multidecade opportunity of the big projects.
Shale producers such as Pioneer Natural Resources Inc. have
begun to add a small number of rigs in anticipation of higher
prices at the end of 2016. They have also started tapping a vast
pool of wells that were drilled but which have yet to be fracked, a
way to keep producing without having to spend as much money.
Oil prices dropped across the board on Tuesday -- Brent, the
international benchmark, fell to $47.96 a barrel, a 4.3% decline --
but the trend is up. Barclays forecast this week that Brent crude
prices will average $57 a barrel next year, up from a forecast
average of $44 this year. A supply glut that has weighed on prices
for two years is easing thanks to outages in Nigeria and Canada and
falling output among U.S. shale drillers.
Some oil companies are now able to cover their costs with prices
stabilizing around $50 a barrel in recent weeks, analysts said.
Their spending cuts are allowing them to meet dividend payments and
invest in new projects, Mr. Gammel said.
"It shows that the companies are at a point where they can
consider investing in longer-term projects," he said.
Oil companies are typically more comfortable making big
investment decisions on future production when prices are stable.
Tudor Pickering said it believes more projects will be approved
this year, including BP's huge deep-water project in the Gulf of
Mexico known as Mad Dog II and Eni's Coral floating
liquefied-natural-gas development in Mozambique.
BP declined to say when it would decide on Mad Dog II. Eni said
it planned to decide on Coral this year.
Tengiz is among a handful of oil-field projects that are
feasible at today's oil prices. Its production costs averaged
around $6.50 a barrel over the past five years, according to Mr.
Gammel. Some analysts estimate that it has brought Chevron more
than $70 billion in revenue, and $40 billion in profits, since
1993, when it became the first foreign oil company to strike a deal
with the former Soviet republic.
Write to Selina Williams at selina.williams@wsj.com and Bradley
Olson at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
July 06, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Chevron (NYSE:CVX)
Historical Stock Chart
From Aug 2024 to Sep 2024
Chevron (NYSE:CVX)
Historical Stock Chart
From Sep 2023 to Sep 2024