Pump it up

Author Ben Winkley

Opec’s policy shift last year turned the oil business Darwinian. Many must perish so the fittest may survive.

Opec’s policy shift last year turned the oil business Darwinian. Many must perish so the fittest may survive.

On the face of it, there was no weakness on display from Europe’s big oil companies this week. Their third-quarter results may have been light on profits, a little too heavy on losses and impairment charges, and the cuts to capital expenditure may be deep, but there is little or no sign of production falling.

BP has shaken off its post-Macondo malaise. BG is pumping more than ever, which will bring smiles to the faces of Shell’s management team. Eni is now targeting full-year production growth of 9pc, up from 7pc previously. Total raised its full-year output growth forecast to at least 9pc from previous guidance of over 8pc. And Statoil is increasing production, despite a fourth quarterly loss in the past five.

Don’t mistake this for a sector in control of its own destiny. Opec — and its affiliated state-owned oil companies — is shaping the market and Europe’s big names must bend to its will. Production increases now are the fruits of money long since spent and the effects of production-sharing contracts usually mean more oil flows to the majors when prices are low.

What the Europeans can do, and are doing, is focus. BP boss Bob Dudley has told his staff that "only the most competitive projects" will be sanctioned, and this message will find adherents in the boardrooms of BP’s peers.

And if this means cutting their losses, then so be it. Following its withdrawal from the Arctic, Shell even more drastically dropped a Canadian oil sands project after taking the decision to go for it — an almost unheard of event for a major. True, the imminent integration of BG’s projects, reserves and production made it easier for Shell to reach these decisions, but the whole sector is figuring out what can and should be done, and adjusting its strategy.

Statoil is waiting for Johan Sverdrup. Total has bought six projects on stream this year. Eni’s huge Egyptian gas find allows it certain amount of breathing space and it has finally got Saipem off its balance sheet — but near the bottom of the market after years of considering its sale during the good times. It’s also touting chemicals business Versalis for outside investment.

Just 18 months ago, these firms were planning five years ahead and more, based on the assumption of oil being more expensive than it is now. The capital expenditure cuts they laid out this week are the result of a situation not of their making. The effects won’t be felt until next decade.