XOM Exxon Mobil Corp

By Sarah Kent and Lynn Cook 

The world's biggest energy companies are treating with caution the rally that briefly lifted crude-oil prices over $50 a barrel this week, wary of boosting spending and production too soon.

Companies including Exxon Mobil Corp., Royal Dutch Shell PLC and BP PLC spent huge sums on giant new oil and natural-gas projects as prices surged over the past decade, only to make large corresponding cuts to their development budgets when prices plunged in 2014 and 2015.

Oil prices are recovering, topping $50 a barrel for the main global benchmark on Thursday -- nearly double the price in January -- before retreating to $49.33 a barrel on Friday. But companies are moving more slowly to start new drilling and production this time around.

"We're not going to try and get into a boom and bust," BP's chief financial officer, Brian Gilvary, said in a conference call last month. Even at $60 a barrel, he said, "We wouldn't be looking to significantly ramp [activity] up."

Shell this week announced a fresh round of job cuts across its business, bringing its total planned for the year to at least 5,000. Earlier this month, the Anglo-Dutch company said it would cut its planned 2016 spending on new projects by nearly 10%.

Oil hitting $50 a barrel may boost smaller producers in places like the U.S.'s shale fields, sending their relatively low-cost projects into the black. But many of the expensive, long-term projects that big oil companies specialize in, such as deep-water wells, require higher prices to be profitable.

Still, some larger oil companies say they can boost production as prices reach the $50 threshold, though the increase may be modest.

Although many of Chevron Corp.'s mega projects around the globe need higher prices to be profitable, the company recently said its Permian Basin operations in West Texas can hum along with crude at $50. Chevron has slashed 40% from its costs in the area and now has 4,000 wells there that give a 10% rate of return when West Texas Intermediate, the U.S. benchmark price, is at $50.

"We are now in full horizontal factory mode in the Permian," said Joe Geagea, an executive vice president for technology and services at Chevron, comparing drilling operations there to a streamlined manufacturing process.

Exxon hit the brakes this year, slashing its budget by 25% and dropping the number of drilling rigs it runs in the U.S. from close to 60 at the height of the oil boom to about 16 as it delayed shale production. What will it take for Exxon to step on the gas again?

"It's not really a price trigger for us," said Jeff Woodbury, vice president of investor relations, when Exxon discussed first-quarter earnings in late April. The company cares more about the broad supply-and-demand balance across the whole world, he said.

Global oil demand is growing, but not fast enough to outpace the crude supply glut that has built up over the two years. A forecast from the International Energy Agency now projects a strong rebound in the second half of 2016, with oil demand rising by 1.8 million barrels a day to 96.8 million barrels a day by the fourth quarter.

Although many U.S. producers have said $50 oil won't spur them to rush out and tap new wells, one of the bigger uncertainties is whether the $50 threshold will lead them to finish the many wells that are drilled but not yet pumping in fields from Texas to North Dakota -- estimated at nearly 4,000 according to data from consulting firm Rystad Energy.

"Consensus appears to be building around the notion that $50 to $55 is tantamount to an industry 'all clear,'" analysts at Tudor, Pickering, Holt & Co. said.

Further out in the futures market, oil is trading over $50 a barrel into 2017. That allows companies to hedge their future output by locking in higher prices today for oil they won't pump until next year, said John England, a vice chairman of oil for Deloitte LLP in Houston.

"A kind of cautious optimism is starting to creep back into the market, even though some support for higher crude prices stems from temporary outages like wildfires in Canada that have shut down oil-sands production and attacks on pipelines in Nigeria," Mr. England said.

:The prevailing view on Wall Street is that $60-a-barrel oil is the new $90, the price needed to trigger the sort of production growth seen during the last upswing that peaked in 2014, said Evan Calio, head of U.S. oil research at Morgan Stanley.

He says that conventional wisdom may be wrong. While some shale producers may start pumping from wells drilled but not completed if oil hangs above $50 a barrel, most will need months of stable prices before they can borrow enough money to ramp up output again, he said.

"Growth will take longer to return than the market expects," said Mr. Calio, who thinks it will take $80 oil prices for American production to increase again.

While large companies are behaving cautiously, some smaller producers are showing resiliency in the face of low prices.

Mike Dynan, vice president of strategy for drilling-equipment maker Schramm Inc., said more small producers are deploying smaller, faster rigs that can punch holes in the ground in less than 48 hours.

"They can't control the price of oil, but they can push their costs down, " he said. "That's what's scary to the rest of the world. The Americans are going to find a way to make some money."

--Erin Ailworth contributed to this article.

Write to Sarah Kent at sarah.kent@wsj.com and Lynn Cook at lynn.cook@wsj.com

(END) Dow Jones Newswires

May 27, 2016 16:37 ET (20:37 GMT)

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