BP said earlier this year that its capex for 2016 would come in at less than the US$17 billion it had initially planned for the year. Shell boasted a 20-percent cut in its capex for 2015 from 2014, to US$29 billion. Exxon in March said it would be reducing its capital budget for the year by a quarter to US$23 billion. To make a long story short, everyone in Big Oil is slashing spending, which is nothing new given the lower for longer price environment.
The new bit is that these cuts are no longer just a knee-jerk reaction to low oil prices—they are the core of a new strategy.
It’s getting increasingly obvious that this price crash hurt oil supermajors more than previous crashes. Perhaps this is only natural: the amount of new discoveries made every year will decline over the decades, as oil is, sadly for many, finite. What’s more, however, these supermajors had been splashing growing amounts of money on new exploration, the results of which have only been getting worse.
Back in 2013, when the going was still pretty good price-wise, BP, Chevron, Shell, and Exxon all posted hefty drops in net profits for the second quarter, suffering the effects of falling reserve replacement ratios. If things were so bad three years ago, imagine what the picture looks like today.
One recent report from the Institute for Energy Economics and Financial Analysis, an energy and environment think-tank, warns that Exxon’s financials are far from tip-top, and if the problems are not addressed, the company may be on a course to irreversible decline. The report cites a 45-percent drop in Exxon’s annual revenues over the last five years and an increasing dependency on long-term loans to maintain dividend payouts. One could argue the report is biased against Exxon, but the figures are publicly available for anyone to double-check their truthfulness.
Since Exxon is not operating in a vacuum and dividends are the holy cow of Big Oil, it’s safe to suggest that the financial picture in its co-supermajors is pretty similar. The good news for them is that they are starting to wake up to the fact that the era of megaprojects worth billions is over.
Instead, Big Oil is starting to follow the example set by independent juniors operating in the U.S. shale: minimum risk and maximum returns. BP, Shell, and their likes are all paying more attention to shale, moving away from the costlier deepwater drilling and challenging environments such as the Arctic. The returns are simply too uncertain to justify the hefty investments. That’s why BP quit its deepwater exploration project in the Great Australian Bight, and that’s why Shell cut its losses from the Arctic and pulled out.
As the Wall Street Journal reports, citing a study from Wood Mackenzie, Big Oil has significantly revised the contributions of conventional and non-conventional oil to its output. Conventional fields are now planned to account for only half of the total, while shale, tight oil, and asset acquisitions should make up the other half.
The supermajors are going small and flexible. They are no longer willing to take huge risks for equally huge but uncertain rewards. The focus is on surer, although lower, returns from projects that can be developed quickly, not over years and years before full-scale operations start.
The insatiable thirst for fatter and fatter bottom lines that actually shrank these same bottom lines is giving way to a cooler, more far-sighted attitude.
By Irina Slav for Oilprice.com
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