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Big Oil’s $45b of Projects Signal Spending Revival

Big Oil’s $45b of Projects  Signal Spending Revival
Big Oil’s $45b of Projects  Signal Spending Revival

Two projects worth $45 billion announced this month show the world’s largest oil companies are regaining the confidence to make big investments, emboldened by rising crude prices and low costs that promise to trigger more expansion ahead.

Chevron Corp. gave the go-ahead to a $37 billion expansion in Kazakhstan, the industry’s biggest undertaking since crude started tumbling two years ago. BP Plc signed off on the $8 billion expansion of a liquefied natural gas plant in Indonesia, Bloomberg reported.

Two more big projects are likely to get a green light this year, according to industry consulting firm Wood Mackenzie Ltd. and Jefferies International Ltd, namely BP’s Mad Dog Phase 2 in the Gulf of Mexico and Eni SpA’s Coral LNG development off Mozambique.

Crude’s recovery from a 12-year low and a decline in project expenses have emboldened executives to start spending again after cutting more than $1 trillion in planned investments amid sinking earnings.

While protecting balance sheets is important, explorers need to at least begin a new phase of investment in exploration and production to ensure future growth.

“We have seen a recent pickup, demonstrating that projects deemed strategically important are still going ahead,” said Angus Rodger, a Singapore-based principal analyst for upstream research at Wood Mackenzie. He expects about 10 decisions on midsize to large projects this year from fewer than 10 last year, though still well below the annual average of 40 before oil crashed.

While the price slump hit profit hard, it has also driven down costs of services and equipment, including rigs. Drillers have renegotiated contracts to get better deals from suppliers as reduced demand creates a buyers’ market.

Chevron’s and BP’s investment decisions “are a signal that they’re more confident of their ability to pay their dividend,” said Jason Gammel, a London-based analyst with Jefferies. “It’s showing more confidence” in cash flows.

As earnings fell, companies faced a choice between protecting dividends and cutting investment. The biggest opted to protect payouts, canceling projects and firing thousands of people.

“Big Oil is still going to be conservative in their spending,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, Missouri. “Those days of several of these big projects going on at the same time are in the past.”

Financialtribune.com