Fracking for shale gas has transformed the US energy landscape
(Image: PA/AP/Brennan Linsley)
Investors are about to find out whether the world's largest oil
companies have learned their lesson from $80 billion of cost blowouts in
major projects during the era of $100 crude.
From liquefied natural gas in Mozambique
to deep-oil in Guyana, the world's biggest energy companies are gearing
up to sanction the first slate of mega-projects since the price crash
in 2014, Wood Mackenzie Ltd. analysts including Angus Rodger said in a
report. Firms will approve about $300 billion in spending on such
ventures in 2019 and 2020, more than in the three years from 2015 to
2017 combined.
That spree will provide the first real
test to the capital discipline that energy companies have vowed they
adopted after oil's collapse, when they downsized their ambitions and
began to complete projects on time and below budget. Before the crash,
the 15 biggest oil and gas projects combined went $80 billion over
budget, eating away at investor returns, Rodger said.
"Oil companies have improved their delivery in small projects, but
can they do it with bigger ones?" Rodger said in a phone interview from
Singapore. "There's massive upside on the table if they can show
sustained success with capital discipline as oil prices rise. They could
deliver the best returns in a decade."
Cost Overshoot
Several years of oil prices in the $100s at the start of this decade emboldened companies to take on massive, complicated projects to extract as much of the valuable oil and gas as they could, Rodger said. That spurred developments like Chevron Corp.'s Gorgon LNG project on the remote Barrow Island in western Australia, where costs ballooned from an initial expected $37 billion to $54 billion.
Cost overruns on projects sanctioned
from 2008 to 2014 diluted returns to 12 percent on average, compared
with an expected 19 percent at the time of investment, according to Wood
Mackenzie.
"Oil companies already had a history of
bad project management, and then adding $100 oil to that was like
pouring gasoline on a fire," Rodger said. "Costs got out of control."
Those weak returns and plummeting oil
prices that began in 2014 forced energy companies to rethink the way
they spend. They started targeting smaller fields or expansions of
existing projects that were cheaper and could be finished quicker.
Fields sanctioned since 2014 have on average been delivered ahead of
schedule and under budget, Wood Mackenzie said.
Scaling Up
While the dearth of
mega projects has helped energy prices recover, with oil and LNG
returning to the highest levels since 2014 earlier this year, large
investments are again needed, Rodger said. What's uncertain is whether
the cost discipline energy companies enforced on smaller projects could
be replicated on a much bigger scale.
For example, oilfield service providers
like Halliburton Co. and Schlumberger Ltd. shrunk their workforce during
the downturn, leaving only the best roughnecks to work on projects. It
remains to be seen if such companies will be able to deliver as
efficiently as they scale up to handle new projects, Rodger said.
Oil companies will also have to avoid
the temptation from rising oil and gas prices to expand the scope of
projects in order to maximize production, Rodger said. Benchmark crude
Brent was trading up 0.7 percent at $73.13 a barrel as of 9:09 a.m.
London on Tuesday, about 44 percent higher than a year ago.
"Will they live with a lean approach and
leave value in the ground, or as prices rise will they want to return
to big projects," he said. "If they feel the latter way, we could see
the same mistakes again."
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