Big Oil Leaders Bet on Long-Term Energy Growth



HOUSTON (Dow Jones Newswires), Feb. 11, 2009

In the eyes of some Big Oil executives, the bulls are still alive.

The captains of BP PLC and Royal Dutch Shell addressed the Cambridge Energy Research Associates conference in Houston with an optimistic message: Their fundamental assumptions for long-term growth in energy demand remain unchanged, despite the precipitous drop of energy prices in recent months. And the industry better continue investing to be ready when demand comes roaring back.

"The future is not canceled," said BP Chief Executive Tony Hayward.

Energy demand "will double between now and 2050" as the developing world becomes richer, said Shell Chief Executive Jeroen Van der Veer. The "art of today is how you can invest throughout the cycle," he said.

Executives and policy makers have raised concerns that the industry is setting itself up for a repeat of the last boom-and-bust cycle. Sharp cutbacks in the 1980s were partly responsible for the sustained rise in oil prices that began in early 2002 and ended in July 2008 at a peak in excess of $145 a barrel.

But keeping a steady hand is hard. Tight credit markets and evaporating cash flows limit the possibilities for investment for many oil and gas companies.

"The whole trick is figuring out how to keep up your investment level when you are under attack from costs and the drop in commodity prices," said Bob Fryklund, a consultant with IHS Inc. (IHS), which owns CERA.

Big Oil executives argued on Tuesday that a way to keep their operations profitable is to exert pressures on costs. "I remember a time when I thought that $40 [per barrel] was a fantastic price" for oil, said BP's Hayward, adding that oil companies allowed costs to get out of hand in a mad rush to develop new fields.

Now "there's an opportunity to reset the cost base," he said.

Lower costs for steel and construction materials should allow a dip in services costs. But tough negotiation tactics also play a role. Andrew Gould, the chief executive of oilfield services firm Schlumberger Ltd. (SLB), said that producers are being "more or less brutal in the way they approach this, and they will attain lower costs."

Schlumberger, the world's largest oilfield services provider, will continue spending in research and technology acquisitions during the downturn.

"Consolidation at the time of a downturn provides the opportunity to renew the fleet and prepare for the next period of growth," Gould said.

As costs readjust, a stable price of $50 a barrel of oil could lead to "plenty of activity," Gould said.

Executives on the refining and marketing side were less buoyant, though. Refining profits have suffered badly from the collapse in demand for gasoline. "The era of comfortable margins is over," said B.N. Bakapur, the director of refining for the Indian Oil Corp.

Collaboration

When energy prices began climbing in 2003, many different sectors of the industry became increasingly confrontational with each other.

The governments of oil-rich countries clamped down on private investment, raising taxes and royalties everywhere from Venezuela to the U.K.

International oil companies -- themselves under heavy criticism from environmentalists, consumers, and Congress -- clamored for access to forbidden tracts of land in North America and loudly complained about the growing fees of services firms.

But at the CERA conference on Tuesday there was increasing talk of uniting in order to survive the downturn.

China National Petroleum Corp. Vice President Jiping Zhou said his company "hopes to join hands" with national oil companies, international oil firms and services firms "to go through the temporary difficult time."

BP's Hayward said that "satisfying future demand will require partnerships between national oil companies and international oil companies, between governments and corporations, and between academia and industry."

Hayward also seemed eager to join the U.S. administration's quest to reframe the country's energy landscape.

"I think we have a great moment here, a real opportunity to work with President Obama and the Congress to craft a comprehensive national energy policy," he said.

Copyright (c) 2009 Dow Jones & Company, Inc.



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