Oil prices at $60 gain currency
Financial Times
Published: February 07, 2008, 00:15
Hidden amid grotty fourth-quarter figures from BP on Tuesday was the disclosure that it now believes oil prices will stay stronger for longer.
BP will test projects' net present value on the basis of a Brent crude price of $60 per barrel for at least five years, up from $40. For chief executive Tony Hayward this marks a shift from his predecessor, Lord Browne, who expressed greater confidence that the oil price would revert rapidly to its mean.
That $60 figure is gaining currency across the industry. Suncor Energy used it in approving a huge C$21 billion investment to upgrade its Canadian oil sands operation.
Anything lower would have threatened a modest 15 per cent hurdle for return on capital - only fractionally above the average return on exploration for conventional oils in the past three years, according to Wood Mackenzie.
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The uplifts represent the industry catching up with reality. Natural conservatism - many executives will remember the 1970s price spikes and the 1980s crash - means planning assumptions have tended to lag spot prices by a significant margin.
However, a survey of almost 250 oil companies by Citigroup in December found that the gap between the oil price used for planning compared with the market prices implied by futures had increased to more than $20 a barrel - the widest on record.
It is easy to understand the concerns of oil executives - after all, crude prices are volatile and the industry has a history of capital indiscipline. Still, raising price assumptions does look sensible. For one thing, the oil companies are struggling to replace their reserves in an environment of aggressive resource nationalism and rampant cost inflation.
And there is still a decent buffer between new planning assumptions and a Brent spot price of $90. Admittedly an easing of tensions could cut the estimated $15 to $30 geopolitical risk premium inherent in the oil price.
But the chances of problems from Latin America to the Middle East evaporating any time soon look as remote as ever.
Carmakers in China
Faced with sluggish markets across much of the globe, carmakers are seeking solace in China. Take Japan's Toyota Motors, which yesterday reported a 7.5 per cent year-on-year rise in third quarter net income on the back of robust growth in China and other emerging markets.
The world's second-biggest car market grew 22 per cent last year, and is forecast to expand up to 20 per cent this year. Much of the received wisdom about the market, however, is starting to look rather dated.
Just a few years ago, carmakers' biggest fear was over-capacity as operators ploughed billions of dollars into plants - and were subsequently obliged to mark down prices on a regular basis.
Today, they are fretting about insufficient capacity. So when a domestic acquisition in effect dissolved a joint venture between Nanjing Auto and Italy's Fiat, Nanjing's new owner was quick to utilise the JV's idle plant.
Multinationals are tentatively eyeing opportunities in cheaper parts of the country, where the government is offering tax incentives to woo investment inland. Those without money to spend are mulling over more flexible options.
Carmakers are rethinking strategies on models too. The smallest cars command a slim - and shrinking - seven per cent market share. China's preference for mid-sized cars makes it more akin to Europe than emerging markets.
Equally, hybrids have been less popular than expected, perhaps because they are relatively expensive but only shave about 10-15 per cent off fuel bills.
The prospects on pricing look a little cheerier. Prices are expected to nudge lower this year but the narrowing gap between similar models in China should create a floor of sorts.
Against that, rising input costs suggest margins will be squeezed further. Of course, not all carmakers are created equal. Some barely scratch a living while others, notably Japan's Honda, cream off operating margins well above the average. Some things, at least, are reassuringly consistent.
A survey found that the gap between the oil price used for planning compared with the market prices implied by futures had increased to more than $20 a barrel.
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