BlackRock: Big Oil Investments

Reuters has an article based on research from Alastair Bishop who is the director and portfolio manager in BlackRock's natural resources team.

One interesting quote from the article:

Oil and gas giants such as Royal Dutch Shell (RDSa.AS), Chevron (CVX.N) and BP (BP.L) are generating as much cash at today’s oil prices of around $70 a barrel as they did in 2014, before crude spiraled down from over $100 a barrel to lows of below $30 a barrel.

Oil, at the time of this article, was at least $30 cheaper, but cash flow was coming in like it used to be $100 plus. That's some significant cost cutting.



The article then goes into the need for an increase in exploration investments. Though Goldman Sachs and Wood Mackenzie issued warnings about the lack of investments, BlackRock appears to just be forecasting that investments will increase.

But given the nature of the business where fields naturally decline as they age and take years to develop, investments will have to grow after 2020 to avoid a dip in production.

Bishop is also concerned about getting too aggressive with investments.

Instead, companies should opt for smaller-scale and phased projects where spending is better controlled such as shale oil and offshore field expansions as well as non-oil and gas projects such as chemical plants and power generation, he added.

This seems to lead to a similar argument made by BP and Cambridge University a few months back. What BlackRock appears to be saying is don't invest too much money and don't go for anything large scale. The concern is that when peak oil hits, there will be issues of over-investment with no potential for a return on capital.

Interestingly, BlackRock sees peak demand hitting earlier than other forecasters who target 2035-ish.

BlackRock sees the transition away from fossil fuels to cleaner low-carbon energy happening faster than many oil companies expect, with oil demand peaking in the early 2030s, Bishop said, around a decade earlier than most other forecasts.

Based on the tone of the article, it doesn't appear that BlackRock is overly concerned about investment levels. Perhaps this is driven by the fact that they see peak demand happening so much earlier than others. If oil peaks much later, that is that much more oil that is needed and therefore might result in calls for more investments. The interesting thing to me is if oil majors follow BlackRock's investment strategy yet oil peaks much later, we could be set up for a major oil crisis. This, of course, is why long term planning can be so tricky.