LONDON // Many oil companies are slashing investment in the face of a $100/barrel collapse in crude prices but, keen to avoid past mistakes and emerge as winners from the downturn, the very biggest are holding spending steady.
ConocoPhillips, the US's third-largest oil company by market value said earlier this month it planned to slash its 2009 capital expenditure (capex) budget by 38 per cent.
On Thursday, the forth largest US producer Occidental Petroleum said it was cutting capex by 25 per cent, while Russia's fourth-largest oil producer, Gazprom Neft, said it could cut by 45 per cent.
In contrast, also on Thursday, the second largest producer, Chevron Corp, said it was holding capex steady and the world's second-largest non-government controlled oil company, Royal Dutch Shell said it would raise spending on projects by five per cent in 2009.
"The bulk of companies are pulling back capex," said Robin Batchelor, manager of the World Energy Fund at fund manager Blackrock.
"The supermajors like Royal Dutch are in a different position. Some of them will be able to take advantage of the situation," he added.
"Supermajor" is the term applied to the five largest non-government controlled oil companies by market value. Exxon Mobil Corp leads the club, followed by Shell, Chevron, Britain's BP and France's Total.
BP and Exxon have not yet disclosed their capex budgets for 2009. Total's chief executive said in a television interview last week that he planned to keep investments stable in volume terms, although he hoped lower industry costs will bring the value down.
The Supermajors' spendthrift actions don't make any sense at today's oil price of around $42/bbl.
Most oil fields can turn a profit at $20/bbl crude and even the world's most expensive oil, crude from Canada's tar sands, can be extracted for around $40/bbl.
However, developing new projects requires much higher prices. The chief executive of BP, Tony Hayward, said on Thursday that companies need oil prices of around $60 to 80 to encourage investment.
Part of the reason this level is needed is because the cost of extracting oil has doubled since 2004, the Shell chief executive Jeroen van der Veer said.
Industry costs are expected to come down as demand for rigs, personnel and equipment dries up, and the Supermajors are delaying some projects to benefit from these expected drops.
Yet, in a world where companies are forced to search in ever deeper seas or harsher climates for oil, no one expects development costs to plunge to historic levels.
The Supermajors continue to invest because they can afford to take a long-term view. Exxon set a corporate earnings record with net income of US$45.2 billion (Dh165bn) for 2008 and Shell set a European record with earnings of $31.4bn, while both Exxon and Chevron posted higher-than-expected quarterly earnings on Friday.
Strong cashflows mean the companies can meet big dividend payments and still bet on a future in which they believe energy costs will rise.
"(We are) in a world that is structurally short of energy," Mr van der Veer said.
The Supermajors have not always been so forward-looking.
"If you go back to the last oil price crash, the large companies cut back and essentially haven't grown production since," Stephen Thornber, Head of Global Oil Research at fund managers Threadneedle said.
Shell's decision to double its capex in recent years was largely forced on it to counter falling production and reserves which were the result of earlier underinvestment.
Soaring crude prices since 2004 were fuelled by the sluggish production growth which followed the industry-wide cutbacks in capex after crude hit $10/bbl in 1998.
Yet, not everyone is convinced the Supermajors' current robust approach to capex shows they have learnt the lesson of the last crash.
Shell's decision to increase its capex reflected "fixed commitments", Alexandre Weinberg, oil analyst at Petercam said in a research note.
The Supermajors' tend to focus on large, complex projects which take years to construct so they have little flexibility in the short term to cut spending.
While an exploration company can cancel a drilling programme at little cost, a half-finished LNG terminal is a waste of billions of dollars of capital.
If oil remains low, the commitment of companies like Shell and Chevron to invest in new capacity may be tested.
"If it looked like oil was going to be in the forties into 2010, then we may see cuts in capex," Mr Thornber said.
*Reuters
2025 Fifa Club World Cup groups
Group A: Palmeiras, Porto, Al Ahly, Inter Miami.
Group B: Paris Saint-Germain, Atletico Madrid, Botafogo, Seattle.
Group C: Bayern Munich, Auckland City, Boca Juniors, Benfica.
Group D: Flamengo, ES Tunis, Chelsea, (Leon banned).
Group E: River Plate, Urawa, Monterrey, Inter Milan.
Group F: Fluminense, Borussia Dortmund, Ulsan, Mamelodi Sundowns.
Group G: Manchester City, Wydad, Al Ain, Juventus.
Group H: Real Madrid, Al Hilal, Pachuca, Salzburg.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances