Time to invest in oil again – Signs for better oil prices seem more realistic
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| International oil companies are back to invest in the oil industry, as the signs for better and improved oil prices seem to be more realistic now. In particular, the meeting last month, which resulted in reduction of crude oil production and in non-OPEC members committing to further reduction such that combined reduction is about 1.2 million barrels, represents major signs in this regard, along with the promise of Saudi Arabia to further reduce if situation warrants it. |
OPEC members along with international major companies took severe cuts in every nook and corner from manpower to cuts in capital projects which forced them to reduce their total investments from over $120 billion in 2014 to less than $40 billion this year, which is the lowest since 2009.
Brighter
In the last few weeks, things have started looking better and brighter. BP started the trend with its announcement last week to buy 10 percent of shares in Abu Dhabi oil fields which can secure about 17,000 barrels per day for the next 40 years at $2.4 billion. Adding more barrels to its portfolio will bring more positive news to its shareholders especially after the Gulf of Mexico mess which cost BP more than $40 billion. This will also enhance its overall portfolio in inverting its core business to the delight of its shareholders.
The cost-cutting exercise certainly managed to reduce its overall cost in managing projects at $50 per barrel instead of the $100 level of the past. Now all companies are feeling good about the level of oil price at $50, making good economic sense by investing in the Middle East region and no other place due to the high cost of oil developments and also to avoid all kinds of environmental risks. The time is ripe now and the companies will not take any risk this time in investing in deep-water developments or sand oils as long as there are opportunities available in the Middle East first.
The French company Total signed a similar deal to own 10 percent in Abu Dhabi oil fields, with the remaining stake shared by other major oil companies, perhaps Shell or ExxonMobil and some small shares for a Japanese company. However, Abu Dhabi will remain the main shareholder with 60 percent while the rest will be shared by its foreign partners.
The oil companies’ attitude is to invest on a smaller scale with caution and grow slowly as the oil prices improve with time, as predicted by some. This is evident from the recent moves by ExxonMobil to invest in gas fields in Canada, by BP to buy another 10 percent share in the gas fields of Egypt from Eni, an Italian Oil $ Gas Company, and by Shell to make oil investments in the coast of Malaysia and be rewarded with more than one billion of equivalent barrels of oil.
Cost cutting is leading the way for small investments, as cash is short and profitability is low, while the annual returns for their shareholders are maintained. With the improvement of oil prices, investment will pick momentum gradually but with the confidence that the oil producers will safeguard their interests. The experience of 2014 is of the past.
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By Kamel Al-Harami
Independent Oil Analyst
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