Like all good Op-Eds (and blogs) this one in the FT started yesterday with a big headline and with some punchy quotes:
The time to stop investing is not today. But that point is coming. The industry needs to be clear that its future is one of long-term decline — whilst returning increasing sums of cash to investors. There is a possibility that the industry over-invests as we reach that point of peak demand, leaving an oversupply that persists for a long time. Fighting for market share in a declining market would be even worse.
Everything in life is relative (well if you are a post-modernist anyway) and the authors are not saying to stop investing tomorrow or that oil is dead: merely ex-growth as an industry. The message is about E&P companies not having a good record at investing in alternative energy sources so encouraging them to return the cash to fund managers (who do apparently?).
We think oil companies can have a positive part to play in our future world of energy — as a cash generating engine that can be used to power the transition when the time comes, and we urge the industry to make a clear commitment to this future.
You can dismiss it as another view that will simply ensure that prices are higher in the future, I guess the question then becomes how far and how high? Or you can take the views seriously as the representatives of one of the UK’s largest fund managers and realise that it is part of a wider secular shift in thinking about business models for E&P companies that require less CapEx and less redundant capacity. I think it just shows how much pressure CFOs/Directors are under to return cash to shareholders all the time and how much harder it is for smaller E&P companies with good project ideas to raise money.
Regardless or your view this is becoming a popular one amongst the actual owners of some companies so it is worth not writing off indiscriminately. The investment narrative isn’t all “growth at any cost”, or future production volumes, which is a marked shift from previous periods where statements like “all the easy oil has gone” doiminated.
In a good interview here Spencer Dale, BP Chief Economist highlighted that
Because of natural decline, there is going to be a huge need for investments to keep supply at pace with demand, even if oil demand were to peak relatively soon.
“For a company like BP, that has a key role in our strategy. Continue to invest in oil, because the world will need that investment, but make sure to invest only in low cost, advantaged oil to make sure that we are robust for this more competitive environment that we think is going to emerge over the next ten to fifteen years.”
That strikes me a very different dynamic to previous eras and will have a huge impact on E&P project developments which are also consistent with the shareholder wishes highlighted above.