Oil CEOs Not Convinced that Low Prices are Over

It’s almost been three months since a decision by major oil-producing nations to cut production heralded a new dawn for beaten-down energy companies. Now, two of Europe’s largest remain skeptical the cuts will be deep enough to arrest a worldwide supply glut, with at least one attempting to drive its “break-even” point even lower.

A break-even point is the oil price that companies need to generate enough revenue to cover their expenses, such as spending on oil wells and paying out dividends. French oil giant Total—like peers including Exxon and Shell—has already spent the last few years cutting thousands of jobs, shelving expensive projects and enhancing operational efficiencies to adapt to lower prices.

Benchmark Brent crude began to stage a recovery in November, when the Organization of Petroleum Exporting Countries and Russia agreed to cut production for the first time since 2008. It has since hovered above the $50 per barrel mark and is currently trading just above $56 a barrel—giving companies more leeway to invest.

“I’m not fully convinced. We are in a volatile market,” Total CEO Patrick Pouyanne told Bloomberg this morning in an interview. “Yes, there is a positive trend and I think markets are willing to go up, but you have some negative impacts potentially.”

He said these could include U.S. shale producers, who typically need a higher oil price to be profitable, returning to the market. Libya, meanwhile, is encouraging foreign investment in its oil industry to keep supplies buoyant and this week signed a deal to sell crude to Russia’s Rosneft.

There are also doubts about whether all of Opec’s 14 member countries will meet their lower production targets. Indeed, Pouyanne said OPEC and Russia will need to extend their six-month deal to cut production beyond its May completion date if they want to trim still-high global inventories.

His pledge to keep lowering costs comes after BP CEO Bob Dudley last week told a conference in Cairo that U.S. shale production would likely limit any further price rises. “Having a price that moves to around $55 or around $60 feels like the right one to help industry avoid dislocations in producing countries,” Dudley said. “The big question mark is shale: what happens to the U.S. shale production as oil prices go up?”

Not everyone’s expecting prices to stay so low. Analysts at Citigroup this week said they saw Brent crude potentially touching around $70 per barrel this year as the OPEC cuts wash through.
Still, they also see prices weakening beyond 2017 due to an expected growth in U.S. supplies.

Pouyanne didn’t suggest a break-even price for Total, though Dudley said last year that BP could still invest in growth at around the $50 a barrel mark. Claudio Descalzi, the CEO of Italian oil company Eni, told last week’s conference in Cairo it could cover its capital expenditure at $50 a barrel.