• 1 hour Midwestern Refiners Seek Canadian Oil To Expand Output
  • 6 hours UK On Track To Approve Construction of “Mini” Nuclear Reactors
  • 10 hours LNG Glut To Continue Into 2020s, IEA Says
  • 12 hours Oil Nears $52 With Record OPEC Deal Compliance
  • 16 hours Saudi Aramco CEO Affirms IPO On Track For H2 2018
  • 18 hours Canadia Ltd. Returns To Sudan For First Time Since Oil Price Crash
  • 19 hours Syrian Rebel Group Takes Over Oil Field From IS
  • 3 days PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 3 days Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 3 days Syrian Rebels Relinquish Control Of Major Gas Field
  • 3 days Schlumberger Warns Of Moderating Investment In North America
  • 4 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 4 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 4 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 4 days New Video Game Targets Oil Infrastructure
  • 4 days Shell Restarts Bonny Light Exports
  • 4 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 4 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 4 days British Utility Companies Brace For Major Reforms
  • 4 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 5 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 5 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 5 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 5 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 5 days Rosneft Signs $400M Deal With Kurdistan
  • 5 days Kinder Morgan Warns About Trans Mountain Delays
  • 5 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 5 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 5 days Russia, Saudis Team Up To Boost Fracking Tech
  • 6 days Conflicting News Spurs Doubt On Aramco IPO
  • 6 days Exxon Starts Production At New Refinery In Texas
  • 6 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 7 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 7 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 7 days China To Take 5% Of Rosneft’s Output In New Deal
  • 7 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 7 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 7 days VW Fails To Secure Critical Commodity For EVs
  • 7 days Enbridge Pipeline Expansion Finally Approved
  • 7 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
Alt Text

Draw In Crude Inventories Lifts Oil Prices

Oil prices reversed course on…

Alt Text

Trump’s Iran Decision Haunts Big Oil

Donald Trump’s Iran decision has…

Alt Text

Saudi Arabia Looks To Shelve Aramco IPO

Saudi sources have confirmed that…

Yale Global

Yale Global

YaleGlobal Online is a publication of the Whitney and Betty MacMillan Center for International and Area Studies at Yale. The magazine explores the implications of…

More Info

How Wall Street Is Killing Big Oil

How Wall Street Is Killing Big Oil

Investors force big private energy companies into liquidation; energy dominance shifts to emerging markets

CHICAGO: Lee Raymond, the famously pugnacious oilman who led ExxonMobil between 1999 and 2005, liked to tell Wall Street analysts that covering the company would be boring. “You’ll just have to live with outstanding, consistent financial and operating performance,” he once boasted. For generations, Exxon and its Big Oil brethren, including Chevron, ConocoPhilipps, BP, Royal Dutch Shell and Total, dominated the global energy landscape, raking in enormous profits and delivering fat dividends to shareholders. Big Oil has long been an investor darling.

Those days are over. Once reliable market beaters, Big Oil shares are lagging: Over the last five years, when the S&P 500 rose more than 80 percent, shares of Exxon and Shell rose just over 30 percent. The underperformance reflects oil majors’ inability to maintain steady cash flows and increase production in a world where much of the easy oil has already been found and project costs are rapidly escalating. Last year, Exxon, Chevron and Shell failed to increase oil and gas production despite having spent US$500 billion over the previous five years, $120 billion in 2013 alone. Under pressure from investors, the world’s largest oil companies are now forced to cut capital expenditure and sell assets to boost cash flows.

Big Oil is, in short, heading towards liquidation. And this process has set in motion a tectonic shift in the global energy balance of power away from western international oil companies, or IOCs, and towards state-owned national oil companies, NOCs, in emerging markets. Not only do the NOCs – companies like Saudi Aramco; Russia’s Gazprom and Rosneft; China’s CNOOC, CNPC and Sinopec; India’s ONGC; Venezuela’s PDVSA; and Brazil’s Petrobras – control approximately 90 percent of the world’s known petroleum reserves, they are also immune to the market pressures constraining Big Oil.

Related: 5 Reasons Oil Prices Are Dropping

Ironically, the rise of emerging-market NOCs and the decline of Big Oil come in the middle of the US-led fossil fuel renaissance. Thanks to higher prices that have made it cost-effective to deploy horizontal drilling technologies to unlock shale oil and gas deposits, the US is set to overtake Saudi Arabia this year as the world’s largest producer of petroleum liquids. The sudden turnaround in America’s energy-supply picture prompted President Barack Obama to shift from calling for a reduction in the country's reliance on petroleum to boasting about higher US oil production and supporting industry efforts to further increase output.

However, the euphoria surrounding new US status as a big-time energy player masks the real existential crisis facing Big Oil. With the vast majority of petroleum reserves controlled by NOCs, the majors are forced to explore in risky, inhospitable, politically unstable and remote regions such as the Arctic or deep under the ocean floor. That means high costs and an uncertain payoff. Exxon, for example, has invested US$40 billion in the Russian Arctic and elsewhere so far this year in a bid to increase output. Exxon’s joint venture with Rosneft in the Kara Sea reportedly discovered what could be a large crude deposit, but was forced to stop drilling due to US sanctions on Russia.

Oil production by the majors has been falling steadily despite a sharp rise in spending. Output peaked at 16.1million barrels per day, mbpd, in 2006 before declining to 14 mbpd in 2012, while capital expenditure increased from US$109 billon to US$262 billion over the same period. Overall, the productivity of capital expenditure by the majors has fallen by a factor of five since 2000 and is declining at 5 percent annually. At the same time costs outpace revenues by 2 to 3 percent per year, while profitability is down 10 to 20 percent.

The majors are on the horns of a dilemma. They urgently need to augment their reserves to avoid becoming a business with no future, simply running down inventory until there’s nothing left to sell. They must simultaneously keep generating strong cash flows to placate shareholders. But reserve replacement means spending more money on exploration and development of new prospects, which leaves precious little cash left over for shareholders. The majors cannot do both.

Faced with the choice of ensuring the viability of their business or placating Wall Street, Big Oil has chosen the latter. Under pressure from investment banks and investors to maintain healthy dividends and high market capitalizations, the majors have opted to prioritize cash flows over reserve replacement. In January, for example, Shell CEO Peter Voser declared that the company would discontinue production guidance – it would stop giving investors projections on future output growth – and instead focus on quarterly cash flow growth. In other words, Big Oil is committing slow-motion suicide to satisfy shareholders.

As part of their attempt to boost cash flow and profits, the majors have embarked on an aggressive program of selling assets. BP is planning to sell US$10 billion in oil producing and refining assets by the end of 2015; it will use the proceeds to buy back shares and increase shareholder dividends. Shell has begun a program to sell US$15 billion in assets to pay down debt incurred to fund capital expenditure. Total is selling a Nigerian offshore oil field among other assets to meet a US$10 billion cash-flow target for 2015.

NOCs are already outspending the majors in exploration and production and have been driving global energy mergers and acquisitions as they seek access to resources, technology and skilled labor. Big Oil’s divestment program is an attractive opportunity for them to further increase their energy footprint and control resources at fire-sale prices. So far Nigerian and Gulf NOCs and sovereign-wealth funds have been most active buyers of IOC assets. Several Nigerian companies such as Seplat and Oando have purchased upstream operations previously owned by ConocoPhilipps and Shell Nigeria, respectively. In February, the Abu Dhabi Investment Council was among the buyers for Shell’s refining operations in Australia. Kuwait Petroleum International purchased Shell’s Italian retail operations earlier this year.

Related: How Long Can U.S. Production Survive Low Oil Prices?

NOCs in net oil-importing countries, such as China, India and South Korea, are set to drive the next wave of IOC asset acquisitions. For Chinese companies especially the majors’ divestment program provides an invaluable opportunity to lock up resources and project power overseas. Led by CNPC, Chinese state-owned energy companies have expanded aggressively in projects from Canada to Kazakhstan to Australia. By next year, Chinese NOCs international operations are expected to produce the equivalent of Kuwait’s oil production, according to the International Energy Agency.

The relative power of NOCs in the global energy market is set to increase further if oil prices remain subdued. According to Goldman Sachs, the vast majority of listed IOCs require oil prices in excess of US$100 per barrel to maintain current levels of capital expenditures and dividends. With oil now falling below US$95, the financial and operational pressure on Big Oil will only intensify.

As the US and Europe's leverage over the global energy landscape dissipates, it will fall to the NOCs to provide leadership on climate change. If they continue to expand production, lower oil prices will continue to lock us into fossil-fuelled growth. According to BP, the world has more than 53 years of oil reserves remaining. That's much more than what we can afford to burn and still preserve life as we know it. This is the next big test.   

By Deepak Gopinath

(Source: YaleGlobal, 16 October 2014)

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News