* Higher investment needed to slow decline in reserves
* Companies vowed to keep discipline after 2014 price crash
* GRAPHIC-Oil companies spending: https://tmsnrt.rs/2CqZfMP
* GRAPHIC-Oil companies reserve life: https://tmsnrt.rs/2wPUtmd
* GRAPHIC-Oil and gas investment: https://tmsnrt.rs/2MXejSx
By Ron Bousso
LONDON, Oct 3 (Reuters) - Executives at the world's biggestoil and gas companies are under growing pressure to loosen thepurse strings to replenish reserves, halt output declines andtake advantage of a crude price rally after years of austerity.
With oil at a four-year high of $85 a barrel, explorationdepartments are urging company boards to drill more, wages arecreeping higher, service companies say rates will have to riseand some investors say Big Oil must start growing again soon.
For the heads of companies such as BP, Chevronand Royal Dutch Shell who have pledged tostick to lower spending after slashing budgets by as much as 50percent since 2014, the pressure may become hard to resist.
As in previous oil price cycles, there are concerns aboutthe strength and duration of the business cycle, now in its 10thyear of growth after the 2008 financial crisis.
Unlike previous oil price cycles, there is the prospect,eventually, of an end to growth in oil demand as the worldshifts to cleaner energy.
But there are already signs some cost cuts implemented afteroil slumped from $115 a barrel in 2014 to $26 in 2016 are beingrolled back.
Shell, for example, said last month its teams in the UKNorth Sea will switch to a less tiring rota of two weeksoffshore then three weeks onshore. During the austerity years,teams spent three weeks offshore then four onshore.
More frequent rotations mean more ships and helicopters willneed to be chartered. Shell says the change will increase costsslightly but is convinced it will make its North Sea operationsmore cost effective and productive.
More generally, salaries across the oil and gas sector haveedged up about 6 percent so far in 2018 after declining in theprevious three years, according to a survey published by Rigzonehttps://www.rigzone.com.
At one major firm, senior managers who had been meeting byvideo conference for several years are now getting flightsapproved for face-to-face gatherings, according to an executiveat the company.
The boards of large oil firms are facing more internalrequests to invest in new projects and acquisitions, and to beefup staff, according to senior executives present at suchdiscussions.
"There is lots of pressure from all the units to get moremoney," said an executive at a large European oil company.(For a graphic showing spending by major oil companies: https://tmsnrt.rs/2CqZfMP)
LONG-CYCLE INVESTMENTS
New project approvals are picking up. Shell and its partnersthis week gave the green light to LNG Canada, one of the largestliquefied natural gas (LNG) projects in recent years.
"Shell's motivations for the project are clear: without thisproject, the company's upstream, LNG contract portfolio and LNGproduction was set to go into decline early next decade," WoodMackenzie https://www.woodmac.com analyst Dulles Wang said.
Typically, after a period of lower capital spending, orcapex, and low prices comes an era of rapid investment as oilrecovers and supplies tighten.
During the lean years, companies cut back sharply. Now, theygenerate as much cash as in 2014 and are vowing to remainthrifty to focus on higher dividends, buying back shares andreducing debt. But in an industry where reserves and productiondecline naturally as oil is pumped from fields, continuedinvestment is considered critical.
"We are likely in need of more long-cycle investments giventhe persistent and accelerating base declines observed in globalconventional and offshore projects," said a source at ininvestment firm with large stakes in big oil companies.
Although some companies such as BP were able to stemproduction declines thanks to technology and lower costs, a dropin new production has taken a toll on the longer-term outlookfor many companies.
Oilfield decline rates doubled from 3 percent in 2014 to 6percent in 2016. For the big oil firms, rates went from 1.5percent to just over 2 percent during the same period, accordingto Morgan Stanley.
"I expect capex rises due to a significant drop in reservoirlife. Some capex will be used to reinvigorate existing wells,"said Darren Sissons, partner at Campbell Lee & Ross InvestmentManagement https://www.clrim.com/site/home, adding thatincreases would be cautious initially.(For a graphic showing reserve life for major oil companiesreserve life: https://tmsnrt.rs/2wPUtmd)
RESERVE LIFE
Spending by the world's top seven oil companies is expectedto rise to a combined $136 billion by 2020 from $105 billion in2017, according to analysts at Morgan Stanley andJefferies.
Starting from the middle of next year, boards will changetheir tone to prepare shareholders for higher spending from2020, Morgan Stanley analyst Martijn Rats said.
"New project awards will likely already accelerate in 2019,but for major developments, capex in the first year tends to belimited. From 2020 onwards, capex is likely to go higher."
Boards are not blind to the pressure. Many companies havedefined a range for spending, while committing to the lower end.Shell, for example, has a "soft floor" and a "hard ceiling" forspending of $25 billion to $30 billion per year.
For some companies such as Italy's Eni, which isdeveloping major gas projects in Egypt and Mozambique, boostingcosts may be unavoidable.
"(Oil companies) proved themselves in a low oil priceenvironment, but at some point they do need to start respendingon new projects to keep getting oil out of the ground," saidDavid Smith, fund manager of the Henderson High Income Trust https://www.janushenderson.com/ukpi/fund/160/henderson-high-income-trust-plc.
Patrick Pouyanne, chief executive of French oil companyTotal, conceded this week that while it aimed to stickto its spending range of $15 billion to $17 billion a yearbeyond 2020, capex could rise to $20 billion.
"Our view is that the majors' capex is probably 5 to 10percent or so too low if they are to maintain their currentreserve lives," said Jonathan Waghorn, co-manager of GuinnessAsset Management's http://www.guinnessfunds.com global energyfund.(For a graphic showing upstream investment by oil and gascompanies: https://tmsnrt.rs/2MXejSx)
The pressure to increase spending also comes at a time oilservices companies are slowly increasing rates, saying theirsacrifices to help Big Oil weather the slump should now berewarded as crude prices rise.
"Current investment levels, particularly in theinternational market, are clearly not sustainable to meet eithermedium-term demand or long-term reserves replacement needs,"Paal Kibsgaard, Chief Executive Officer of Schlumberger,the world's largest oil services provider, told a conferencelast month.
He said the international production base neededdouble-digit growth in investment for the foreseeable futurejust to keep production at current levels.
But investors and executives say reserve life - which was atits lowest in at least two decades in 2017 - is no longer thegold standard for measuring the health of oil companies.
A spending splurge could also eat into profits and revivefears oil companies are returning to the wasteful practices ofthe first half of the decade when crude prices soared.
"Historically, excess free cash flow above dividend cost hasseen capex rise in the industry but the sector is trying toshake off the capital indiscipline tag and I believe they willstick to that," said Rohan Murphy, analyst at Allianz GlobalInvestors https://www.allianzgi.com.
(Additional reporting by Shadia Nasralla, Dmitry Zhdannikov andSimon Jessop in London, Bate Felix in Paris, Nerijus Adomaitisin Oslo, Ernest Scheyder in Houston; editing by David Clarke)
