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Big Oil has trouble finding new fields
David R. Baker, San Francisco Chronicle
These should be the best of times for Big Oil.
Petroleum prices have tripled in five years, and gasoline prices reached record heights last summer. International oil companies are making the kind of money most capitalists can only dream of.
Chevron Corp. is expected to report a record annual profit today, topping $17.5 billion. And that’s less than half of what Exxon Mobil probably made last year. Exxon earned $39.5 billion in 2006 – the largest annual profit for any American company, ever – and will report its 2007 results today, as well.
And yet, for an industry awash in income, Big Oil faces serious long-term threats. Its profit and its very future are under pressure, both at home and abroad.
The large, global companies commonly known as Big Oil – companies such as Exxon, Chevron, BP and Shell – are having a hard time finding enough new oil fields to replace the petroleum they pump out of the ground. And the fields they’re finding are in hard-to-reach places like the bottom of the sea, where drilling and pumping costs far more than it does on land.
…Although the amount the oil companies spend on alternative energy pales in comparison to their overall budgets, they appear to be trying to create a role for themselves in a carbon-constrained world.
“I think at heart they think of themselves as energy companies,” said John Felmy, chief economist for the American Petroleum Institute, the industry’s main lobbying group. “Production of energy of any type is at its root an engineering problem. And these companies, in terms of the people they have, have a better collection of those skills than any other companies in the world.”
Chevron Chief Executive Officer David O’Reilly has often said his company can adapt to the world’s changing energy picture. Chevron will supply energy in multiple forms, although he insists oil isn’t about to disappear.
“We’re a pretty resilient bunch,” O’Reilly once said in an interview with The Chronicle. “We’ll be around. We’ll be selling energy. We’ll be providing energy services. But I’m confident it will be quite different than it is today.”
(1 February 2008)
Western majors feel the squeeze
Ed Crooks and Dino Mahtani, Financial Times
Daniel Yergin, the chairman of Cambridge Energy Research Associates and author of The Prize, a history of the oil industry, argues that this is one of the toughest times for oil companies since the wave of nationalisations in the 1970s.
“The irony is that the other challenging times were when the oil price was low,” he says. “Now it is because oil has gone to $100 [a barrel].”
Results on Thursday from Royal Dutch Shell, kicking off the reporting season for the world’s biggest oil companies, offered support for the argument that they are businesses in terminal decline.
…The industry’s production figures have been disappointing in part because of the high oil price in countries where companies operate under production-sharing contracts. As the price rises, the contracts generally give the country a greater share of any oil produced.
This has exacerbated the fundamental problem: that the oil and gas resources in the international companies’ traditional bases in the US and Europe are running out, while getting access to the still-abundant resources of the Middle East, Africa, and South America has become more difficult.
…Another challenge to the western oil companies comes from increasingly assertive emerging market companies,
…Mr van der Veer [of Shell] argues that by 2015, the world’s output of “easy” oil and gas, which is cheap to extract and to sell, will no longer be able to meet rising demand, meaning more demand for the difficult resources: oil sands – where Shell is investing heavily – very deep water, and so on.
That means, Mr van der Veer says, that there will be plenty of opportunities for big oil companies.
“We have to shift to the difficult end of the barrel. And if you are good at that you can make a lot of money.”
(31 January 2008)
Shell feeds doubts about oil industry
Titus Kroder and Mark Krümpel, Financial Times (German version)
The second largest private oil company of the world, Royal Dutch Shell, has initiated new speculations about crude oil and gas reserves becoming increasingly scarce in the industry.
Whereas the enterprise announced a record gain of 27,6 billion dollars for 2007 in the past year, the new reserves, which are proven and capable of being developed, have halved compared to the previous year, down to 1 billion barrel.
Furthermore even with higher investments the company cannot avoid getting less oil out of the ground. Thus in 2007 the production decreased by six per cent, while production costs increased by ten per cent.
… Investors are particularly sensitive to the topic of Shell’s reserves. In 2004, the company had to reduce its reserves by a third due to false evaluations. The scandal led to a big confidence crisis between the company and its investors.
With sinking production and rising development costs Shell can only make profit due to a high oil price, experts said on Thursday. In the last months it was easy for the industry to increase profits.
“These numbers leave no doubt about the ability of the oil companies to profit from high oil prices”, said Peter Hutton, analyst of the stock broker NCB. Another fact that irritated investors was: Shell did not want to repeat its modest growth forecast of a maximum of two per cent by 2010. Finance executive committee member Peter Voser only said that production will fall “slightly” in 2008. On the other hand according to Shell costs will rise this year by seven per cent to up to 29 billion dollars.
In view of rising costs a continuous pressure threatens the oil companies’ profit margins. According to the analysis house Cambridge Energy Research Associates (CERA) already in the past two years the expenditures for the development and promotion of new occurrences rose about the average of 53 per cent.
Furthermore private oil companies are challenged by losing the race for the remaining reserves. Already now state companies like Saudi Aramco or Gazprom now control 90 per cent of the global oil and gas occurrences. They will hardly allow big oil companies like Shell, BP or Exxon in coming years to enter new fields, since they increasingly manage them without western know-how and selling capacities. Therefore it might be difficult for western oil companies to replace their production with new reserves. At a constant production that would mean on a long-term basis that the private companies run out of oil.
Additionally the competition for oil fields got stronger due to the high demand from developing countries such as China and India, which develop their own fields as much as possible. China is planning to quadruple its strategic oil reserves by 2010. In order to achieve this goal, the Chinese do not shy away from commitments in politically delicate countries such as Iran or Angola. According to the international energy agency (IEA) the western oil companies will descend in the next years to marginal players, which are limited to the promotion of oil fields, which require technically sophisticated knowledge. This is needed for instance with the production from deep waters or from permafrost soil as well as from oil sands or oil shale.
(1 February 2008)
A rough translation from the German by contributor driller. The official version should appear sometime later at Financial Times: ft.com.
UPDATE: Official version now posted at Finanacial Times.
