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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Is the Era of Oil Megaprojects Over?

Offshore oil rig

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. Related: Will Electric Cars Be Cost Competitive By 2020?

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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  • Jack Ma on October 30 2016 said:
    All new oil comes from the sea, or at least 11%. Deep sea fracking added to the existing wells means the cost is lower and the deep sea wells can live for many years. Technology and efficiency improvements make deep sea oil cheaper over the life of the project. Head fakes are always inverse to head facts...

    Warmest regards to all
  • Bill Simpson on October 31 2016 said:
    It kind of shows how, without OPEC artificially restricting oil output for decades, and thus keeping prices elevated, there wouldn't be much of an oil industry today outside the Middle East, where the cost of production is lowest. Once the easy oil ran out, everyone would have said, gotta shut this down and just buy from the Persian Gulf countries.
    It doesn't take a rocket scientist to figure out what will happen after less resources are dedicated to searching for a larger and larger share of a diminishing resource necessary for survival. The only question is how long will it take before increasing production from the Gulf states can no longer cover the coming decline of oil production everywhere else? The Gulf state producers won't be able to make up for the coming production decline nearly everywhere else forever. I give them about 3 more years. But that depends mostly on Iraq, which could produce millions more barrels a day if everything went right for them. And who knows what the Russians can do. Those basins are quite large, and the vast Arctic shelf little explored.
    The only thing we can say for sure is that a massive oil price spike will hit before 2025. Once it starts, watch out, because there will be no way to increase oil output after that. It will be impossible, because you could never increase exploration as fast as the older fields deplete. Too much of the easy oil will be gone. An infinite amount of money couldn't stop the production decline, and there isn't as infinite amount of money. That will begin the Great Collapse, and take down the financial system due to an economy which will be forced to shrink from less energy being available to do work. We can't change physics.

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