Study examines return-investment balance

Europe and Africa are the regions under greatest scrutiny by major oil and gas companies trying to tighten capital discipline in response to pressure to improve shareholder returns, concludes a new report by Wood Mackenzie.

An analysis by the consultancy of individual projects identified $1 trillion of discretionary capital expenditure planned worldwide during 2014-18. The total excludes spending on unintegrated LNG projects.

“Finding the right balance between maximizing returns in the short run with the strategic need for continued investment to sustain the business will be the key,” WoodMac writes.

If major companies cancelled projects now at stages before final investment decisions with internal rates of return below 15%, capital spending would decline $30-35 billion/year at peak, the consultancy estimates.

Cutting those investments would increase average returns on new projects by 3-4% for all major companies, it says. But total production by those companies would decline by 2.5 million boe/d, or 13%, by 2025.

Eni, Statoil, and Chevron have the highest proportion of uncommitted capital expenditure, and all three have already started to push back marginal projects,” WoodMac writes.

Savings on capital spending deferred on low-return projects would increase dividends by 40-50%, the consultancy says, calling this an extreme and unlikely outcome. Still, “We certainly expect more focus on shareholder returns to emerge throughout 2014.”

The analysis indicates major companies operate projects accounting for 15% of $651 billion of capital spending planned in the US. Elsewhere, the majors’ operated shares and estimated discretionary capital spending are 67% of $118 billion in Africa, 12% of $122 billion in Canada, 60% of $74 billion in Europe, 8% of $56 billion in Latin America (52% operated by Petrobras), 48% of $22 billion in Asia, 1% of $17 billion in Oceania, 0% of $13 billion in Russia and the Caspian, and 0% of $6 billion in the Middle East.

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