The price of Brent Crude has hovered around the $70 per barrel mark for about three months. In July 2021, the price averaged $75, while in July 2020 it was $43 per barrel, meaning it saw a 60 percent increase in just one year.
As oil demand is recovering sooner than expected and by next year is likely to reach pre-pandemic levels at 100 million barrels per day, the question remains as to whether upstream investments (exploration and production) will gradually reflect the rebound in oil prices.
Some international oil companies are still keeping their spending restrained after the rebound in oil prices over the past year, especially in the US, where activity has not yet stepped up, which is clearly reflected in slowing US oil production growth.
Their cautious approach of spending and largely sticking to budgets and drilling programs set last year when prices were at historical lows will make it possible for exploration and production companies to pay down debt rapidly.
IOCs have incurred huge losses due to the drop in oil prices and derivatives in 2020 following the repercussions of lockdowns imposed by countries to limit the spread of the coronavirus.
The combined losses of the oil majors, namely Chevron, ExxonMobil, Shell, Total and BP, were $77 billion for 2020. All these factors put pressure on IOCs to make difficult decisions to reduce costs through mass layoffs or sharp cuts in upstream investments.
After steep fluctuations in oil prices last year to a rebound with sustainability at the current levels around the $70 per barrel mark (with relatively flat fluctuations this year, except for August), the oil industry is waiting for a return in upstream oil investments by IOCs or market domination by national oil companies with high reserves and much lower costs.
In the second quarter of 2021, ExxonMobil recorded net profits of $4.7 billion, Chevron $3.1 billion and Shell $3.4 billion.
Despite the increase in net income in 2021, IOCs announced capex cuts. For instance, ExxonMobil reduced its capital spending to $25 billion a year through 2025 — a $10 billion reduction from its pre-pandemic target. Chevron’s 2021 capex was reduced to $14 billion from the annual $22 billion.
This huge upstream capex cut took place simultaneously with increased pressure by environmentalists on banks to stop financing fossil fuel companies. Calls for defunding fossil fuel companies resulted in the European Bank for Reconstruction and Development stopping investment in upstream oil and gas projects as part of plans to align with the goals of the Paris Agreement on climate change. Also, the Asian Development Bank said that it would no longer finance oil exploration and production projects.
It worth mentioning that Saudi Aramco capital spending is on the rise. In the first half of 2021 it was in the range of $15.6 billion, an increase of almost 13 percent of what was spent in 2020 — estimated at $13.6 billion — and also higher than capital expenditure in the first half of 2019 (before the pandemic), which totaled $14.4 billion.
There is no surprise that Saudi Arabia will lead increases in oil and gas production globally through 2030, as international energy majors remain wary of fluctuating demand and focus on short-term profit, according to Fitch Ratings. This will result in increased production by the Kingdom of crude oil, condensate and natural gas liquids by 2.24 million barrels a day between 2021 and 2030.