Oil majors to keep investing to avoid past mistakes

By Tom Bergin - Analysis

LONDON (Reuters) - Many oil companies are slashing investment in the face of a $100/barrel collapse in crude prices but, keen to avoid past mistakes and emerge as winners from the downturn, the very biggest are holding spending steady.

ConocoPhillips (COP.N), the United States'' third-largest oil company by market value said earlier this month it planned to slash its 2009 capital expenditure (capex) budget by 38 percent.

U.S. No.4 Occidental Petroleum (OXY.N) said on Thursday, it was slashing capex by 25 percent, while Russia''s fourth-largest oil producer, Gazprom Neft (SIBN.MM), said it could cut by 45 percent.

In contrast, on Thursday, U.S. number 2, Chevron Corp (CVX.N) said it was holding capex steady and the world''s second-largest non-government controlled oil company, Royal Dutch Shell Plc (RDSa.L) said it would raise spending on projects by 5 percent in 2009.

"The bulk of companies are pulling back capex," said Robin Batchelor, manager of the World Energy Fund at fund manager Blackrock.

"The supermajors like Royal Dutch are in a different position. Some of them will be able to take advantage of the situation," he added.

"Supermajor" is the term applied to the five largest non-government controlled oil companies by market value. Exxon Mobil Corp (XOM.N) leads the club, followed by Shell, Chevron, Britain''s BP (BP.L) and France''s Total (TOTF.PA).

BP and Exxon have not yet disclosed their capex budgets for 2009. Total''s CEO said in a television interview last week that he planned to keep investments stable in volume terms, although he hoped lower industry costs will bring the value down.

SPENDTHRIFTS OR LONG-TERM THINKERS?

The Supermajors'' spendthrift actions don''t make any sense at today''s oil price of around $42/bbl.

Most of today''s oil fields can turn a profit at $20/bbl crude and even the world''s most expensive oil, crude from Canada''s tar sands, can be extracted for around $40/bbl.

However, developing new projects requires much higher prices. BP CEO Tony Hayward said on Thursday that companies need oil prices of around $60-80 to encourage investment.

Part of the reason this level is needed is because the cost of extracting oil has doubled since 2004, Shell CEO Jeroen van der Veer said on Thursday.

Industry costs are expected to come down as demand for rigs, personnel and equipment dries up, and the Supermajors are delaying some projects to benefit from these expected drops.

Yet, in a world where companies are forced to search in ever deeper seas or harsher climates for oil, no one expects development costs to plunge to historic levels.  Continued...