HOUSTON (Dow Jones)--In September 2004, oil prices surged above $50 a barrel for the first time, foreshadowing today's bullish energy market that shows no sign of abating.
Despite that landmark price, BP PLC (BP) continued to base its investments on $30 oil, BP Chief Executive John Browne told analysts a few months later on a conference call. BP's restraint reflected the residual caution of an industry that has grown accustomed to boom-bust cycles, including the 1998 downturn that sent oil to the single digits.
As oil prices today hover near $120 a barrel, the caution exhibited by Browne and other industry leaders in 2004 continues to guide Big Oil's industrial psyche. Although the oil giants have raised their long-term guiding price somewhat over the ensuing period, companies have settled on perhaps $45-$60 a barrel rather than anything approaching triple digits, analysts said.
"These are back-of-the-envelope numbers but we estimate companies are using a price that ranges from $45 to $50,"James Crandell, an energy analyst at investment firm Lehman Brothers, said of the industry's collective view.
"Most majors I would say are closer to $60 oil long-term," said Arjun Murti, analyst at investment bank Goldman Sachs & Co. "Though ExxonMobil (XOM) in all likelihood would consider a more conservative forecast than that."
While there is some debate on whether the energy industry's residual caution is pinching long-term investment decisions, the attitude accounts for the industry's broader response to the current boom period, including an over-arching skepticism towards predictions that oil prices have moved permanently higher, or that the world has moved into the so-called "peak oil"
era.
"Major oil companies have gone through cycles before and the memory of very low prices is very vivid for them," said Fadel Gheit, analyst at Oppenheimer & Co. "They have to be very careful."
'Hard Truths' instead of 'Peak Oil'
Executives from the oil majors generally resist releasing long-term pricing forecasts for competitive reasons. ConocoPhillips (COP) and Exxon Mobil Corp. declined to comment on their price assumptions, whileChevron Corp. (CVX) didn't immediately respond to a request.
However, some executives have on occasion offered recent readings of how the oil market will play out for the foreseeable future. In November, BP Chief Executive Tony Hayward predicted that medium-term oil prices would be in the $60-$80 range.
"For the medium term, it's very clear the era of cheap energy is behind us," Hayward said on the sidelines of a Houston event.
Even as most oil majors dismiss the notion of "peak oil" - that world oil production has gone, or will soon go, into irreversible decline - the industry has embraced the idea that meeting global energy demand is becoming more challenging. The oil majors have touted a National Petroleum Council titled "Hard Truths" that was released amid last summer's soaring prices.
But while the industry has nudged up its price forecasts, executives from Exxon and other companies continue to allude to a possible price correction down the road. Analysts from Credit Suisse and other leading investment banks have also predicted that a new era of consolidation could shake out later amid sharply lower prices.
The simple reality is that companies won't approve projects that only work at $120 oil because they fear that oil could slip back to half that price, or less.
"I'll venture to say that most oil companies are probably using a price that is closer to half what the current price is," said Gheit. "Smaller companies will likely use the high price deck and large companies lower price deck."
The larger the company, the larger their exposure to price declines and the more conservative the forecast. For that reason, Exxon, which is the largest US oil company by market capitalization, is seen as having the most conservative forecast of all of them.
"The big fear of these companies is: What if prices fall in the future?" Murti asked. "They are going to be stuck in a project that was built in a high cost environment but actually doesn't produce until prices are lower."
Murti said major oil companies are investing as much as they can, given their opportunities. Some major hurdles to additional investment from the oil majors include difficulty gaining access to choice reserves abroad and rising cost-inflation for labor and oilfield supplies.
A recent report by Lehman Brothers pointed to the credit crunch as another factor constraining oilfield investment - at least in the most recent months.
Although the industry was beginning to embrace a more aggressive investment approach, economic uncertainty since August 2007 likely caused "oil companies to reconsider making huge upfront sunk cost investments in new supply basins," Lehman said.
Source: Isabel Ordonez, Dow Jones Newswires; 713-547-9207; isabel.ordonez@dowjones.com