Big oil finding money for biggest projects

$36.8-billion project agreed by Chevron, Exxon Mobil and their partners suggests oils deep freeze might be thawing
may point to confidence in an oilprice recoveryafter they collapsed from around $115 a barrel
here are signs the deep in mid-2014 to a low of $27 in
freeze in oil-industry spend- Januarybut it is still early days.
Big-energy company executives
ing is beginning to thaw.
Chevron Corp., Exxon Mobil have said they are treating the oilCorp. and several partners on price rally with caution, warning
Tuesday committed $37 billion to that as prices rise, investment
expand an oil project in could kick in from U.S. shale proKazakhstan known as Tengiz, one ducers and American output could
of the biggest investments since quickly ramp up again. Just on
crude prices collapsed two years Tuesday, U.S. crude prices dropped
almost 5% to $46.60 as traders worago.
Last week, BP PLC gave the ried about an uptick in U.S. drilling
green light to a multibillion-dol- activity.
A similar price rally last year
lar gas export expansion complex.
It follows the U.K. oil giants had quickly fizzled. Since oil prices
announcement in June that it is started collapsing in the summer of
fast-tracking a major offshore gas 2014, companies have delayed or
discovery in Egypt. Italys Eni SpA canceled about $270 billion in projis moving ahead on an Egypt field ects through March, including
as well.
expensive Arctic developments,
according to Rystad Energy.
In choosing to invest
Great Britains vote to leave
now, the worlds biggest
energy companies get to
the European Union adds
benefit from a huge drop
another level of uncertainSPECIAL
ty, with the effect on marin drilling costs that has
kets, oil demand and
accompanied the oil-price
fall. Pumps, valves, drilling rigs, investment still to be determined.
construction and engineering
But the Chevron announceservices, steel and even labor are ment on Tuesday is an inflection
cheaper because the contractors point, said Jefferies senior oil anathat provided those services have lyst Jason Gammel, noting that it is
less work than in the boom years the first investment of more than
after the financial crisis when oil $10 billion this year.
Tengiz is already one of the
prices traded around $100 a barrel.
The recent wave of investments most profitable projects in the past

SELINA WILLIAMS & BRADLEY OLSON

London/Houston 6 July

The Tengizchevroil oil and gas refinery plant at Tengiz oil field in
western Kazakhstan. Tengiz is one of the most profitable projects in
PHOTO:REUTERS
the past 40 years.

40 years. Its a terrific time to be

making this sort of investment,
said Todd Levy, Chevrons president for exploration and production in Europe, Eurasia and the
Middle East. Chevron is the projects operator.
Since the start of 2015, Chevron
and other big oil firms have slashed
their budgets by a quarter
exceeding $30 billion overalland
cut more than 30,000 jobs to
endure a prolonged period of low
prices. That has forced them to
scour the globe for opportunities
that meet a very narrow set of criteria: They have to boost produc-

tion in the years ahead so the companies avoid shrinking, and they
have to be profitable at $50 oil.
Since prices began falling, they
havent often been able to find such
a sweet spot. Last year, Western oil
companies approved just four such
major projects, including in the
Gulf of Mexico, Norway, Egypt and
Ghana. So far in 2016, energy companies have taken the plunge on
eight big expensive developments,
according to Houston energy
investment bank Tudor Pickering
Holt & Co. And more are expected
this year, the bank said.
Still, these wont come online

for years. The first oil from the

Tengiz expansion, for instance,
wont come until 2022.
Exxon, Chevron, Royal Dutch
Shell PLC and BP are turning to
U.S. shale wells as well. Those
operations require less upfront
investment to begin producing but
also dont approach the scale or
multidecade opportunity of the
big projects.
Shale producers such as
Pioneer Natural Resources Inc.
have begun to add a small number of rigs in anticipation of higher
prices at the end of 2016. They have
also started tapping a vast pool of
wells that were drilled but which
have yet to be fracked, a way to
keep producing without having to
spend as much money.
Oil prices dropped across the
board on TuesdayBrent, the
international benchmark, fell to
$47.96 a barrel, a 4.3% decline
but the trend is up. Barclays forecast this week that Brent crude
prices will average $57 a barrel next
year, up from a forecast average of
$44 this year.
A supply glut that has weighed
on prices for two years is easing
thanks to outages in Nigeria and
Canada and falling output among
U.S. shale drillers.
Some oil companies are now
able to cover their costs with
prices stabilizing around $50 a

barrel in recent weeks, analysts

said. Their spending cuts are
allowing them to meet dividend
payments and invest in new projects, Mr. Gammel said.
It shows that the companies
are at a point where they can consider investing in longer-term projects, he said.
Oil companies are typically
more comfortable making big
investment decisions on future
production when prices are stable.
Tudor Pickering said it believes
more projects will be approved this
year, including BPs huge deepwater project in the Gulf of Mexico
known as Mad Dog II and Enis
Coral floating liquefied-natural-gas
development in Mozambique.
BP declined to say when it
would decide on Mad Dog II. Eni
said it planned to decide on Coral
this year.
Tengiz is among a handful of
oil-field projects that are feasible at todays oil prices. Its production costs averaged around
$6.50 a barrel over the past five
years, according to Mr. Gammel.
Some analysts estimate that it
has brought Chevron more than
$70 billion in revenue, and $40
billion in profits, since 1993,
when it became the first foreign
oil company to strike a deal with
the former Soviet republic.
Source: The Wall Street Journal