As Oil Prices Rise Big Companies Must Exercise Capital Discipline
A fragile OPEC deal has lead to a rise in oil prises meaning companies must be wary of repeating the mistakes of the past. They must avoid throwing away investor cash on high-risk, high-cost projects, that make neither economic or climate sense, according to analysts at the Carbon Tracker Initiative.
As prices hover at a three-month high and as OPEC countries signal their ambition to rein in output further to support prices, big oil needs to exercise capital discipline and not react by following a business-as-usual investment strategy on any strong oil price recovery.
This is all the more important as the Paris Agreement which aims to slash greenhouse gas emissions by shifting away from fossil fuels to limit warming to well below two degrees Celsius (compared with pre-industrial times) nears entering into force.
Paul Spedding, former head of HSBC and an advisor to Carbon Tracker has set out the reasons why big oil needs to avoid repeating the mistakes of recent years in a blog for FT Alphaville here: http://ftalphaville.ft.com/2016/10/03/2176464/guest-post-big-oil-should-exercise-capital-discipline-as-prices-rise/
His views and that of Carbon Tracker on the risks associated with any knee-jerk reaction to higher oil prices are summarised below. Listed international oil companies need to:
· Forego the temptation to pursue an investment binge, be mindful of short-term price volatility and exercise capital discipline
· Avoid a ramp up in spending as seen between 2011–2014 (where capital budgets rocketed) only to see poor returns despite $100 oil
· Be mindful that investing for growth in high-cost projects does not deliver returns for shareholders
· Invest in a business model tailored to a 2 degrees climate target demand profile that has lower costs and lower risk than the traditional growth model pursued by the majors as shown by CTI’s “Sense and Sensitivity” report published earlier this year
· Be conscious that a swathe of multi-billion dollar write-offs since 2015 shows that they did the exact opposite
· Avoid a large scale return to high cost oil sands and deep water, ultra deep water projects on any significant price hike
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