Oil majors plan to spend more as costs soar
MOSCOW, March 21 (Reuters) - The biggest western oil firms plan to invest much more in finding and producing oil in 2006 than in 2005 but investors and consumers will be disappointed the extra spending has not translated into higher production targets.
Last year, as oil prices hit new records above $70 per barrel, politicians demanded the big, integrated oil and gas companies invest more of their bumper profits in finding oil, to boost supplies and cool prices.
However, rampant oil services inflation, the need to look for oil in more inhospitable locations and an increased focus on natural gas and heavy oil, which require costlier infrastructure than ordinary crude, mean that while capital expenditure is rising, growth plans are static.
"Higher capex and unchanged production growth targets were the clearest trends from the integrated oils year-end strategy presentations," Lehman Brothers said in a research note last week.
Rising costs will provide long term support for oil prices, and make it harder for oil firms to repeat the record earnings they reported last year, on the back of higher prices, analysts said.
"It's going to impinge on underlying profitability ... profitability is reaching a peak," Jason Kenney, oil analyst at ING in Edinburgh said.
Analysts cut their earnings forecasts for some firms, including Italy's ENI (ENI.MI: Quote, Profile, Research) and Royal Dutch Shell Plc. (RDSa.L: Quote, Profile, Research), because of the extent of their capex increases.
U.S. oil major ConocoPhillips (COP.N: Quote, Profile, Research) led the field with a 45 percent increase in projected investment spending for 2006 over 2005, followed by rival Chevron (CVX.N: Quote, Profile, Research), which boosted its budget by 35 percent.
Neither said how much was due to cost inflation but analysts said across the industry, higher costs accounted for between 30 and 50 percent of announced increases.
The rest largely reflected more expensive schemes, investment in acquired assets and projects that would not come on stream until the end of the decade.
CAPEX RISES SET TO CONTINUE
European oil firms were also forced to boost spending plans. Shell, the world's third-largest listed oil firm by market capitalisation, upped its 2006 capex budget to $19 billion from $15.6 billion last year.
The Anglo-Dutch company has been struggling to rebuild its asset base and halt production slides since admitting in 2004 that it had exaggerated its reserves for years.
Analysts believe Shell's reserves overbooking scandal was partly prompted because underinvestment in exploration in the late 1990s meant actual bookings were poor.
Shell is not seen as the only company to underinvest in finding oil in that period, when oil fell to around $10 per barrel. The industry has picked a bad time to make up for this mistake.
"The international oil companies' attempt to move back towards a reinvestment phase (is) in an inflationary cost environment," Credit Suisse said earlier this month.
Oil executives put inflation in the industry at more than 10 percent per annum although costs of some inputs have risen more sharply. Rates for some drilling rigs jumped 250 percent last year.
Most industry players expect the trend to continue.
"We expect oil company capex to grow 15-20 percent per annum until at least the end of the decade," Morgan Stanley said in a research note last month.
GOOD NEWS FOR SERVICE FIRMS
The higher costs that oil firms face reflect a jump in the prices of key inputs such as steel and a shortage of skilled labour, as the average age of engineers in the industry approaches 50 years.
However, the trend is largely because of stronger pricing power on the part of the companies which build and hire out drilling rigs, operate production platforms, lease ships and floating storage facilities, and design the equipment the industry uses.
Increased investment by the oil majors is good news for this group.
"(This) should lead to strong order intake and rising profit margins for European oil services firms," Morgan Stanley added.
The tightness in the oil services market and the majors' strong reliance on it, is also, at least partly, a result of the late 1990s move to limit capital expenditure.
"Major oil and gas companies started outsourcing everything from accounting to research and development (in this period) .. technology transferred to the oil service industry," Dennis Proctor, chief executive of drilling equipment maker Hunting Plc. said.
Environmentalists may also find some good news in the majors' increased spending plans because, in the case of the big European oil firms at least, these include a big jump in investment in renewable energy resources.
"We estimate a run-rate of capex (in renewables) going forward of around $2 billion per annum across the group; four to five times higher than the run-rate over the last 10 years," Merrill Lynch said.
Last year, as oil prices hit new records above $70 per barrel, politicians demanded the big, integrated oil and gas companies invest more of their bumper profits in finding oil, to boost supplies and cool prices.
However, rampant oil services inflation, the need to look for oil in more inhospitable locations and an increased focus on natural gas and heavy oil, which require costlier infrastructure than ordinary crude, mean that while capital expenditure is rising, growth plans are static.
"Higher capex and unchanged production growth targets were the clearest trends from the integrated oils year-end strategy presentations," Lehman Brothers said in a research note last week.
Rising costs will provide long term support for oil prices, and make it harder for oil firms to repeat the record earnings they reported last year, on the back of higher prices, analysts said.
"It's going to impinge on underlying profitability ... profitability is reaching a peak," Jason Kenney, oil analyst at ING in Edinburgh said.
Analysts cut their earnings forecasts for some firms, including Italy's ENI (ENI.MI: Quote, Profile, Research) and Royal Dutch Shell Plc. (RDSa.L: Quote, Profile, Research), because of the extent of their capex increases.
U.S. oil major ConocoPhillips (COP.N: Quote, Profile, Research) led the field with a 45 percent increase in projected investment spending for 2006 over 2005, followed by rival Chevron (CVX.N: Quote, Profile, Research), which boosted its budget by 35 percent.
Neither said how much was due to cost inflation but analysts said across the industry, higher costs accounted for between 30 and 50 percent of announced increases.
The rest largely reflected more expensive schemes, investment in acquired assets and projects that would not come on stream until the end of the decade.
CAPEX RISES SET TO CONTINUE
European oil firms were also forced to boost spending plans. Shell, the world's third-largest listed oil firm by market capitalisation, upped its 2006 capex budget to $19 billion from $15.6 billion last year.
The Anglo-Dutch company has been struggling to rebuild its asset base and halt production slides since admitting in 2004 that it had exaggerated its reserves for years.
Analysts believe Shell's reserves overbooking scandal was partly prompted because underinvestment in exploration in the late 1990s meant actual bookings were poor.
Shell is not seen as the only company to underinvest in finding oil in that period, when oil fell to around $10 per barrel. The industry has picked a bad time to make up for this mistake.
"The international oil companies' attempt to move back towards a reinvestment phase (is) in an inflationary cost environment," Credit Suisse said earlier this month.
Oil executives put inflation in the industry at more than 10 percent per annum although costs of some inputs have risen more sharply. Rates for some drilling rigs jumped 250 percent last year.
Most industry players expect the trend to continue.
"We expect oil company capex to grow 15-20 percent per annum until at least the end of the decade," Morgan Stanley said in a research note last month.
GOOD NEWS FOR SERVICE FIRMS
The higher costs that oil firms face reflect a jump in the prices of key inputs such as steel and a shortage of skilled labour, as the average age of engineers in the industry approaches 50 years.
However, the trend is largely because of stronger pricing power on the part of the companies which build and hire out drilling rigs, operate production platforms, lease ships and floating storage facilities, and design the equipment the industry uses.
Increased investment by the oil majors is good news for this group.
"(This) should lead to strong order intake and rising profit margins for European oil services firms," Morgan Stanley added.
The tightness in the oil services market and the majors' strong reliance on it, is also, at least partly, a result of the late 1990s move to limit capital expenditure.
"Major oil and gas companies started outsourcing everything from accounting to research and development (in this period) .. technology transferred to the oil service industry," Dennis Proctor, chief executive of drilling equipment maker Hunting Plc. said.
Environmentalists may also find some good news in the majors' increased spending plans because, in the case of the big European oil firms at least, these include a big jump in investment in renewable energy resources.
"We estimate a run-rate of capex (in renewables) going forward of around $2 billion per annum across the group; four to five times higher than the run-rate over the last 10 years," Merrill Lynch said.
posted by Marcel at 3:52 AM
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