Is Confidence Coming Back to the Oil Industry?

We need investment to avoid a supply gap in the long run
July 6, 2016 Updated: July 7, 2016    

News Analysis

The huge downturn in oil prices has lead to significant reductions in capital spending by oil companies. Expansion projects have been on hold for the last two years because of unpredictable and volatile prices. However, major oil companies think now the time to invest is now.

Chevron Corp. (NYSE:CVX), Exxon Mobil Corp. (NYSE:XOM), and their two partners announced on July 5 they will proceed with the $37 billion expansion project in the Tengiz oil field in Kazakhstan. This is the largest investment in new production since the collapse of oil prices in June 2014.

Reserve lives could go down substantially if there is no significant upturn in capital expenditures.
— John England, Deloitte

“Significant reductions in capital expenditures will potentially cause a significant supply gap in the future,” said John England, vice chairman and U.S. oil & gas leader at Deloitte LLP.

“Reserve lives could go down substantially if there is no significant upturn in capital expenditures. So some of the recent news [on investments] may be indicative of that.”

Chevron said the project would increase the daily crude oil production at the Tengiz oil field by nearly 260,000 barrels. After the completion of the project, the total production of the oil field will reach nearly 1 million barrels per day. The first oil production from the expansion is planned for 2022.

“The project builds on a record of strong performance at Tengiz and will add value for Chevron and its stockholders,” said Chevron’s Chairman and CEO John Watson in a press release.

“The project is well-timed to take advantage of lower costs of oil industry goods and services,” said Jay Johnson, executive vice president, Upstream, of Chevron Corp.

Tengiz is a deep, supergiant oil field. The top of the reservoir is about 12,000 feet below the surface, according to a report published in the Oil and Gas Journal. And it is considered one of the most profitable fields in the modern oil era.

“I don’t think a lot of companies can make large multiyear investments,” said England. Due to balance sheet constraints, he rather expects to see capital spending in small projects, like in the U.S. shale plays. They tend to have shorter lives and faster returns on capital.

We think supply and demand will reach balance by the end of 2016.
— John England, Deloitte

Some analysts considered the announcement as an indicator that the oil prices have stabilized, making international oil companies more confident in investing in big projects.

“We think supply and demand will reach [a] balance by the end of 2016. There is still a substantial amount of inventory so it will take a while to really see prices come up,” said England. He believes an oil price of $60 per barrel in 2017 is a realistic assumption.

“Given the cost reductions that the industry has put in place over the last couple of years, we think that the industry can function fairly healthy at these price levels,” he said.

With significant cost reductions and efficiency in operations, England believes the oil industry is much more resilient for the future.

Chevron is Kazakhstan’s largest private oil producer, holding stakes in the nation’s two biggest oil fields—Tengiz and Karachaganak.

In April 1993, the Kazakh government granted an exclusive 40-year right to Tengizchevroil LLP (TCO) to develop the Tengiz and Korolevskoye oil fields located in the northeastern reaches of the Caspian Sea. 

Chevron owns 50 percent of TCO; the other partners in the joint venture are ExxonMobil (25 percent), Kazakh oil and gas company KazMunayGas (20 percent) and a subsidiary of Russian Lukoil LukArco (5 percent).

Chevron is also the largest private shareholder in the Caspian Pipeline Consortium, which operates a 935-mile crude oil pipeline from Tengiz to Novorossiysk on the Russian coast of the Black Sea. The pipeline provides the key export route for crude oil from TCO and Karachaganak.

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