Financial Times: Oil and gas supermajors struggle to produce: Posted Thursday 17 November 2005
By Sheila McNulty in Houston
Published: November 16 2005
The world’s biggest oil and natural gas companies’ exploration budgets used to represent two-thirds of the spending on exploration but in the past decade this has dwindled to barely two-fifths.
The “supermajors” – defined as the top seven groups by market capitalisation – still spend billions annually. But analysts warn that unless they increase spending, there could be more dependence on Opec supplies, which could lead to even higher energy prices.
Andrew Latham, vice-president of upstream consulting for Wood Mackenzie, a consultancy group, says: “These companies slashed their exploration budgets in 1999 as a response to low oil prices and as a means to reduce discretionary costs in the aftermath of their mega-mergers.” But he adds that, although their spending has since recovered, it is still below 1998 levels, with much of the recent growth “being eaten by high inflation in areas such as drilling”.
Exploration is expensive and difficult. The easily accessible fields have been tapped, forcing companies to drill ever deeper into the ocean and in increasingly remote areas. The supermajors require large finds to replace their huge pools of reserves, and about 80 per cent of the world’s reserves are in the hands of national oil companies.
ExxonMobil, despite its size, produces only 3 per cent of the world’s production. Russ Roberts, Exxon spokesman, says: “Having access and the technology to develop these resources is just the beginning. Once you find it, you can’t always grab it. There are government issues, contracts, et cetera, to finalise.”
Besides, analysts note, the companies are publicly traded, so their first masters are shareholders, who have been encouraging short-term boosters such as share buybacks – Exxon spent $5.5bn (£3.2bn, €4.7bn) of its near $10bn third-quarter earnings on them.
“Returning cash to shareholders is preferred to riskier opportunities,” Dr Latham says. He says smaller independents still use exploration investment as an engine for growth, but they can replace reserves by developing fields too mature to offer the supermajors replacement value.
Amy Myers Jaffe, energy expert at Rice University, says the megamergers of 1998 – when Exxon bought Mobil and Chevron bought Texaco – have had their share of problems. She points to Shell’s overruns in Sakhalin; Exxon’s problems in Russia and Venezuela; and the lack of big deals in Saudi Arabia and Mexico. “The so-called megadeals have been a bit of a mirage,” Ms Jaffe says.
Companies such as Marathon that did not merge have been drilling and finding at a small scale, she says, and are still replacing reserves. “Wall Street said they wouldn’t survive as little companies because they wouldn’t be able to do these mega projects – seems like Wall Street was wrong,” she says.
Donald Campbell, Chevron spokesman, admits being a supermajor has its challenges as they must develop larger fields, which takes longer and requires more capital. “It can take 10 years from discovery to first oil.”
Yet being a supermajor also enables the companies to replace reserves by other means besides exploration. He says they have an advantage in securing international partnerships with national oil companies because they have financial clout, technical expertise, and offer a full range of services including shipping and marketing.
The big oil groups also use acquisitions as a means to boost reserves, such as Chevron’s recent purchase of Unocal. However, these deals tend to be over-priced and are not rated highly by some analysts. Observers also point out that although acquisitions may increase the size of a company, they do nothing to add to total global oil reserves.
Another avenue for the supermajors is to develop alternative sources such as the fuel of future generations – natural gas.
Exxon says 80 per cent of its additional resources came from drilling, and the remaining 20 per cent from capturing already discovered resources, such as gas from Qatar and a bigger share of the Kashagan field in Kazakhstan. This has enabled Exxon to replace 100 per cent of its production for 11 consecutive years, Mr Roberts says.
The supermajors say they do not have to invest more in exploration because of efficiencies created by merging and new technologies. However, the sector is facing added costs, not least because of the recent surge in the price of renting an exploration rig. The International Energy Agency, the watchdog for developed countries, caculates that the cost of drilling one foot has more than doubled since 1990 in real terms.
In contrast, Exxon says it has lowered its finding costs each year since the 1980s. Its size, global scale and technological improvements have pushed down the costs from $2.75 per barrel in the late 1980s to $0.44 per barrel in 2004.
Ms Jaffe points out that with oil trading about $60 a barrel, Exxon could afford to spend a lot more on exploration. “If they can invest at 44 cents a barrel, what’s their risk? If prices drop to $5 a barrel, 44 cents is still a pretty profitable number to get in at.”
Dr Latham says investors want companies to spend more. He points to Petrobas, which achieved “outstanding value creation” despite only average returns, due to heavy investment in exploration.
The supermajors have signaled exploration budget increases, he says, yet inflation, diminishing prospect sizes and deeper objectives all threaten returns.
“The supermajors cannot easily find sufficient material targets without access to new areas, such as the Arctic or Opec countries,” Dr Latham says. “Whether the current high prices are the catalyst for opening of these areas remains to be seen.”
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