Bullish oil outlook fuels investment splurge
BY DOUG CAMERON
HOUSTON -- A uniformly bullish outlook on oil prices among lenders and investors has triggered a surge in funding for North American energy projects that has left some industry veterans questioning whether the market may be headed for a correction.
The abundant liquidity available to develop tight oil and shale gas in the U.S. also contrasts with tougher financing markets for overseas developments, with efforts to develop rich fields off East Africa viewed by some as a test of investor appetite.
Cheap debt and the ready availability of alternative funding from private equity, sovereign wealth funds and others have fed the industry's voracious appetite for investment in new projects, with capital spending on upstream projects to explore and extract oil and gas seen topping $1.3 trillion this year, according to consultant IHS Cera.
Some industry experts fear too much money may be chasing too few good projects, while two years of oil trading within a narrow price band may have lulled some investors into a false sense of security should the market reverse.
"This could be a very dangerous moment for funders of the industry," BP strategy chief Fergus MacLeod said at the IHS CeraWeek industry conference here, providing a sober assessment of an industry that appears to be in rude health.
Mr. MacLeod said the capital intensity of the industry has increased as exploration moves into more far-flung geographies or utilizes new technology such as the fracing process used to extract shale gas.
That has dented free cash flow at many companies, leaving it on a par with when oil was just $18 or $20 /bbl rather than around $100. Nevertheless, investors remain convinced oil will continue in its narrow band.
"It's hard to find pessimism about the oil price," said Maynard Colt, co-president of Tudor, Pickering Holt & Co., a Houston-based investment bank.
This has seen the so-called price decks--assumptions of future oil prices, used by energy companies and investors to assess projects--continue to rise.
Part of investors' bullishness is generational.
"A lot of investors haven't lived through a downturn," said Osmar Abib, co-head of global energy at Credit Suisse, during a panel discussion at the conference. "In the mid to late 1980s, [Houston] was pretty much a ghost town."
Now, Houston is booming, and the attraction of joining the U.S. march to becoming the world's largest energy producer is reflected in financing terms not seen since 2007.
That includes the re-emergence of "cov-lite" structures that offer limited investor protection.
"I get the sense that the worm is about to turn," said Peter Gaw, global head of oil, gas and chemicals at Standard Chartered Bank. Mr. Gaw said that while there was "capital aplenty" for the U.S. market, it was a different story overseas.
Many banks have pulled out of project finance deals, and the availability of long-term funding had contracted despite the greater role being assumed by export credit agencies, and by banks in Japan and South Korea. The new Basel III capital rules are expected to increase that aversion to long-term funding, he said.
If oil prices do fall, financiers and industry executives on the Houston panel were split on the impact on future development.
Mr. Holt and his fellow bankers saw investment starting to be choked off should crude fall to $75 to $80/bbl.
BP's Mr. MacLeod was more sanguine, pointing to the industry's ability to adjust its costs to lower prices. He noted that when crude fell below $10/bbl, production continued relatively unscathed.
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