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The Comeback Is On!

17.11.2017 / Energyboardroom

With crude prices now having rallied back to above USD 60 a barrel and many of the oil supermajors posting annual profits double or more than that of the year before, some analysts are now beginning to wonder whether big oil is in the process of making something of a resurgence.

“You have to remember that we’re a pretty resilient bunch in this business”

John Watson, Chevron

“You have to remember that we’re a pretty resilient bunch in this business and well used to peaks and troughs,” laughs Chevron CEO John Watson. “I think you’re going to see quite a few of the big players are bouncing back because we’ve all been much more selective in our searches for new sources of energy for quite a while now. We have been really scoping in on the lowest-cost projects and options and there comes a point where this discipline starts to pay off.”

The prevailing mood right now certainly stands in stark contrast to the pessimism of the weeks and months following the price crash of late 2014. After all, as recently as February last year, with barrel prices having bottomed out at a mere USD 26, certain commentators had even questioned the future viability of such mammoth, integrated structures.

“Prudence, of course, remains very much the order of the day”

Ben van Beurden, Shell

Now the big majors appear to be back in the black, but with the fundamental difference that they are meaner, leaner and more operationally efficient than before. “With the global price having been stuck at low levels for more than three years, and the prospect of peak nowhere in sight, we are working towards the assumption that prices will be low forever and have restructured our business model accordingly,” confides” Shell’s CEO Ben van Beurden. “Prudence, of course, remains very much the order of the day,” he adds.

Moreover virtually everyone is adamant that there will be no return to the extravagant, freewheeling, heady spending days of the 4-year super cycle when bespoke designs and gold plating of projects was the norm. “We would certainty not welcome a return to the recklessness and ill-disciplined days of USD 100 crude, the business model of the majors is working considerably better at this level,” opines Patrick Pouyanné, CEO of Total. “As an industry, we have been using this period to learn how to break old habits of boom an bust and to act counter-cyclically, which all starts from maintaining a strong balance sheet,” he elaborates.

Statoil’s CEO Eldar Saetre very much concurs that the paradigm has shifted and that there will be no turning back the clock. He paints a picture of a brave new world of E&P in which digital technologies optimize and automatize overall operations and standardized, off-the-peg solutions are used wherever appropriate. “This is about leaner operations in the future, about maximal recovery of resources from our reservoirs, about increasing the probability of success of exploration and about injecting regularity into our operations…future oil installations will require fewer people to operate. They will need more people to work on the data, but fewer actually doing drilling or on the platforms,” he forecasts. “There is absolutely no time for complacency of course, we have to all be making headway with this transition.”

“There is absolutely no time for complacency of course”

Eldar Saetre, Statoil

This is just as well because many analysts are not convinced the current price rebound will hold indefinitely. “Oil markets have been facing major geopolitical risks with intrigue in Saudi Arabia, Iraq’s response to the Kurdistan independence bid, potential new US sanctions on Iran and an economic and political collapse in the offing in Venezuela and we believe it is largely this spike in geopolitical risk that is pushing the price higher,” warns Joseph McMonigle, senior energy policy analyst at HedgeEye.

Opinions are split about the extent to which political purges in Saudi Arabia are giving a short-term bullish momentum to oil prices. “Uncertainty about core regime stability has gone up a bit, so a higher risk premium is justified,” explains Samuel Ciszuk, a senior adviser to the Swedish Energy Agency. “Events in Saudi Arabia always matter a great deal for the global oil market not only because of the country’s considerable production, reserves and dominant OPEC role, but because the kingdom is also an influential player in regional politics and security, a large donor and a substantial holder of foreign assets,” points out Mohamed El-Erian, chief economic adviser to Allianz.

OPEC’s next move will also likely have an impact. The oil producers’ cartel now seems more likely to back an extension to production curbs (reducing production by 1.8m barrels a day), which were set to expire in March 2018. “OPEC is on the brink of doing something pretty unprecedented in not only working for their own members’ interests, but for the good of the entire world in helping to maintain a healthy price above USD 50,” shrewdly remarks BP’s CEO, Bob Dudley.

“There are clear indications that the oil market is rebalancing at an accelerating pace,” affirms OPEC secretary general, Mohammad Sanusi Barkindo, “but we need to be looking at extending these curbs because that is the only viable option to a stable marketplace.” “I am certain that if we had not mobilized ourselves when we did, building consensus and jointly taking action, we would all be in a worse condition than we see today,” he warns.

“It’s pretty obvious that OPEC needs to maintain its current position. This goes beyond just balancing demand because it’s also about giving assurance and confidence to financiers… the global investor community really need to know that OPEC and non-OPEC countries are going to continue to be able to interact positively with the market to balance supply and demand over the long term,” argues ENI’s chief executive, Claudio Descalzi.

“It’s pretty obvious that OPEC needs to maintain its current position.”

Claudio Descalzi, ENI

Whatever way the cookie crumbles, the oil majors now look more resilient and better prepared. “As an industry we have demonstrated our powers of adaptation. When we are in a low cycle, we have low costs. Everyone has been learning how to better manage their costs,” reflects Pouyanné. Even the recent profits have not come about through profligacy with drilling budgets, but are more a narrative about benefiting from money invested before the rout. Meanwhile Bernard Looney, head of E&P for BP, insists that “some two-thirds of cost savings” his company has implemented are “structural, rather than cyclical, and will be durable over the long-term.” Thus the gains made are clearly here to stay.

Writer: Louis Haynes

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