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U.S. Shale Has Set An Example For Oil Majors

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It took the oil supermajors quite a while to come to terms with the new oil price realities. The blow from the 2014 price crash was so severe and apparently unexpected that they needed two years to start changing their tack. Luckily, Big Oil had a good example to follow: shale boomers.

True, a lot of independents active in the U.S. shale patch went under during the crisis. True, production costs are not exactly the same as Saudi Arabia’s, even for the lowest-cost producers in the shale patch. And true, these production costs are now rising for shale producers as oilfield service providers get back on their feet after two years of offering cut-my-own-throat discounts to the producers just to keep going.

It’s difficult to find a reliable estimate for production costs in the shale patch. Some sources, such as the Wall Street Journal, peg the average at US$23 a barrel. Continental Resources’ Harold Hamm, however, warned last month that oil below US$50 is “unsustainable”, and if crude slips below US$40 a barrel, it could deal a severe blow to many producers. The remarks suggest that most shale producers are far from the US$23 a barrel that the WSJ calculates as an average.

But it’s not about production costs, it’s about the attitude. Shale producers, unlike Big Oil, don’t deal in projects that take years before the oil starts flowing. They deal in projects where oil starts flowing quickly and returns are seen in just months, not years. Now, FT’s Andrew Ward writes, Big Oil is increasingly adopting this attitude to its own projects as a way of adjusting to the new normal.

Ward quotes data from Wood Mackenzie that shows the cost of new Big Oil projects has fallen over the last three years from about US$7 billion to less than US$4 billion. Additionally, capex per barrel of oil fell from US$15 in 2015 to US$11 in 2017. Related: Barclays: Oil Could Rise By $7 If U.S. Sanctions Venezuela

New large-scale projects are few and far between. Brownfield, rather than greenfield, developments are the norm, at least for the time being. BP, for example, recently utilized the latest in digital imaging to find a whole new oil field underneath one it is exploiting. Shell said it could bring down costs at its Mars platform to less than US$15 a barrel. These are just a couple of examples of the change we are seeing in Big Oil, a transition to a whole new way of thinking.

It looks like this transition is being successful, if we are to judge by the latest quarterly financial reports from some of the supermajors.

Shell reported a triple increase to US$3.6 billion in its net attributable profits, excluding identified items. Operating expenses fell to US$9.55 billion over the quarter from US$11.55 billion a year earlier. CEO Ben van Beurden attributed the results to cost-cutting activities, as well as the oil price improvement. Related: Electric Vehicles No Threat To Oil Prices Anytime Soon

Total also said it did better this second quarter than a year earlier thanks to cost reduction measures. The French major booked a net profit of US$2.5 billion, up 14 percent on the year, with operating cash flow rising 33 percent to US$5.3 billion even though, CEO Patrick Pouyanne said, the price of Brent crude, the international benchmark, only rose by 9 percent in the period.

Exxon and Chevron are combining the cost-cutting drive with boosting their exposure to shale, taking advantage of the benefits that the shale patch offers alongside the independents, who have now turned into Big Oil’s main competition. The two reported second-quarter figures today and, given their increased exposure to shale oil, it’s hardly a wonder that both reported profits, with Exxon posting a twofold increase in its net result to US$3.4 billion and Chevron swinging into a profit of US$1.45 billion from a loss of US$1.47 billion a year earlier.

The price crash has certainly been instructive for Big Oil. It has made the supermajors more cautious with their investment strategies, and although some warn that this cut in investments will come back to bite them in the form of an oil deficit that they wouldn’t be able to respond to, it’s likely that this new attitude to new projects will in fact make better use of resources – a win-win scenario.

By Irina Slav for Oilprice.com

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Leave a comment
  • Kr55 on July 30 2017 said:
    Is it really a good example to just grow production by borrowing money and issuing shares? That's all 90% of shale producers do. Majors have to actually grow organically and have a long term view. Shale producers just borrow beyond their means to hit targets for exec bonuses.

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