Big Oil to Start Spending Again After Two-Year Slump

Big Oil to Start Spending Again After Two-Year Slump

Major oil companies are beginning to invest in projects as oil prices show signs of recovery

By

SARAH KENT and KEVIN BAXTER/WSJ

Updated Oct. 18, 2016 1:04 p.m. ET

LONDON—The prospect of rising oil prices has the global energy industry considering a strategy that has been unthinkable for much of a two-year-long market slump: Making new investments.

Big oil companies are moving ahead with new spending again, says BP PLC Chief Executive Bob Dudley on the sidelines of the Oil and Money conference here. The British oil company he heads has taken final investment decisions on a handful of projects this year and is expected to approve more in 2017, he said.

“Investments are back,” Mr. Dudley said. “But it’s only going to be the very best.”

Mr. Dudley’s comments highlight a pervasive sentiment among oil-industry executives and government officials that there is light at the end of the tunnel, as they grope through one of the industry’s darkest moments.

For the past two years, the industry has been roiled by oil prices that collapsed to less than $50 a barrel from 2014 highs of $114 a barrel, and never recovering to those previous highs. Now, with the Organization of the Petroleum Exporting Countries promising a modest output cut and prices generally on the rise, executives and industry leaders say they have a sense of guarded hope as oil prices hover around $50 to $52 a barrel.

Mr. Dudley predicted an oil price of between $50 and $60 a barrel in 2017, compared with prices that have ranged between $28 a barrel and $53 this year. Ali Moshiri, president of African and Latin America Exploration and Production at Chevron Corp., said U.S. shale producers would invest again if prices rise to $60 a barrel.

“The phenomenon of shale oil is real and when prices rise to $60 a barrel you will see the level of active rigs rise. This is inevitable,” Mr. Moshiri said during a panel discussion.

A rising oil price would allow the energy industry to make needed investments, restore some of the tens of thousands of jobs cut in the past two years and stem some of the economic pain rippling through oil-dependent economies from Venezuela to Saudi Arabia.

Cuts by OPEC, the 14-nation cartel that controls more than a third of the world’s crude production, would amount to about 1% to 2% of its 33.2 million barrels a day of production and help draw down the vast oversupply of oil that has flooded world markets.

But OPEC and other oil producers must be careful, said Fatih Birol, the executive director of the International Energy Agency, in an interview here. Pushing prices too high would boost U.S. oil output, stop rapid declines in production in countries like China and Colombia and put a brake on fragile oil demand, he said.

Oil-industry investment declined in 2015 and 2016 and is likely to fall again in 2017 unless there is a sea change—the first time in recorded history that energy investment would decline for three straight years, Mr. Birol said.

John B. Hess, chief executive of the New York-based oil company Hess Corp., warned that without new investments, the world’s balance of supply and demand would turn quickly from a glut of oil today to a shortage of petroleum in the future.

“We’re not investing enough today…to ensure that oil supply keeps up with demand, 2018, 2019, 2020,” he said.

ConocoPhillips Chief Executive Ryan Lance said the recent rise in prices wouldn’t be enough for companies to start spending money again on massive long-term projects. “Prices are still pretty low to justify significant investments,” Mr. Lance said.

Ian Taylor, the chief executive of the world’s largest independent oil trader, Switzerland-based Vitol Group, said the oil-market’s supply and demand balance would remain out of whack for the next year. His price prediction for October 2017? $54.99, compared with about $52 in recent days.