If investors are not able to better match the cost structure to oil prices and maintain a reasonable level of investment, they risk compromising the very structure of the industry. The industry has had to adapt by reducing its costs in a targeted way, diversifying and developing more efficient and safe technologies. While consumers around the world are enthusiastically welcoming the drop in the price of oil per barrel, a few skeptics rise to prevent the future scarcity of “black gold.”
According to an expert sourced at this article, the historic reduction in oil investments could be preparing the world for “unpleasant surprises regarding supply in the near future.” Flip-flop or visionary? Does today’s over-abundance precipitate the lack of tomorrow’s? This type of phenomenon is inherent in any industry based on cycles of long-term investment. Investors are the first victims of decisions made by oil companies seeking to balance or increase their cash flows. After several years of growth, investments in oil have faltered. According to industry experts, investments declined by 25% in 2016, and they expect a further decline in 2018. These figures reveal the magnitude of the current crisis: two consecutive years of decline have not occurred in the industry since 1986.
This decline in oil investing is particularly visible among the major investors who are eagerly awaiting a payment of their dividend. The latter is the main performance indicator used by the markets, and the companies are very reluctant to revise it downwards. Last year, there were only a couple of companies that revised downward. For these companies, the reduction in investment is a very good leverage to retain cash and satisfy their shareholders.
Many experts anticipated this price decline by keeping their investments under control in recent years. On the contrary Shell, ExxonMobil, and ConocoPhillips achieved the most spectacular cuts with respectively -25%, -22% and -41%. These figures can be explained by the greater exposure of these companies to non-conventional deposits and American shale deposits. They have higher total costs than others and are the first ones whose viability is called into question. In fact, in the United States, the shale hydrocarbon industry has prepared for a steep decline in production but a sharp increase in profits.