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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Which Oil Major Is The Most Resilient?

  • Wood Mac analysts looked into supermajors’ costs, balance sheets, and portfolios, to rank them based on what the consultancy calls cash margin.
  • On this basis, Chevron topped the ranking with a cash margin of close to $18 per barrel of crude.
  • Judging by plans announced earlier this year by the three European supermajors, diversification is not a top priority.

A few years ago, it was all about growth in oil, as fast as possible. Today, things are very different. Gone are the growth plans. Gone are the budgets based on $60 for a barrel of Brent. The boom is out. The bust is in. And the only way for oil majors to ride this bust out is to become as resilient as possible, even in the face of further shocks.

Some of them are already ahead of the competition: according to a study by Wood Mackenzie, Chevron and Shell are performing much better than Total and BP, at least in some respects. But there is more work to be done for long-term resilience.

Wood Mac analysts looked into supermajors’ costs, balance sheets, and portfolios, to rank them based on what the consultancy calls cash margin. It defines this cash margin as a post-tax cash flow plus capex per unit of production. The consultancy then looked at the cash margins of supermajors under two oil-price scenarios: $30 and $70 per barrel.

On this basis, Chevron topped the ranking with a cash margin of close to $18 per barrel of crude, if that barrel cost $30. Shell came second, with a cash margin of about $16 per barrel of crude. The rest, in descending order, were Exxon, Total, Equinor, BP, and Eni at the bottom, with a cash margin of about $12 per barrel of oil if that barrel cost $30.

Of course, the majors that are most resilient at low oil prices also do the best in the high-oil price scenario thanks to diversified and robust portfolios. LNG is a particular favorite, according to Wood Mac, as it can generate substantial cash returns that more than offset the upfront costs of LNG projects, usually calculated in billions. So are offshore projects: although high in upfront costs, these have long productive lives and low operating costs, Wood Mac’s chief analyst Simon Flowers noted.

Where does shale stack up against the other types of assets and projects in the oil industry? Well, on the one hand, shale operations provide their owners with production flexibility. A company can easily delay well-drilling operations when prices fall and boost them when prices rise, according to Wood Mac’s analysts. On the other hand, shale oil well drilling is very capital intensive because these wells, quick to drill and put on stream, are also quick to dry up.

All of the oil majors have shale operations but one, and that’s French Total. For all the flexibility that shale offers, chances are, Total was not too sad it that it doesn’t have acreage in the Permian given the latest developments there. And yet those that do have acreage in the Permian are pretty upbeat about it. Chevron, for example, is among the largest players in the Permian, and it also has the highest cash margin among the supermajors. BP was also happy with its purchase of the BHP assets in the U.S. shale patch. And Exxon has big plans for its Permian projects, eyeing production costs of as little as $15 a barrel. Related: The Real Reason Russia Joined OPEC+

All of the oil majors also have a solid offshore oil and gas presence, including in LNG. All of them either exited or drastically reduced their exposure to Canadian oil sands, which are rightly considered high-cost assets, and most of them are betting heavily on renewable energy. Will these diverse portfolios enhance or reduce their resilience in the future?

Judging by plans announced earlier this year by the three European supermajors, diversification is not a top priority. The shift away from oil seems to be the priority. Of course, it will be a while until we see how these plans pan out, but it does seem that oil and gas assets--these companies’ core business--may have become somewhat of a burden lately. Quite a burden, if BP is right: the company said it might take a hit of $13 to $17.5 billion in oil and gas asset writeoffs this year. It is unlikely to remain the only one suffering overexposure to oil and gas.

Yet oil and gas are not going anywhere. The world's demand for fossil fuels will continue for the observable future despite pressure from governments and environmentalist groups. As long as there is demand, there will be production. The question is, which production is most resilient to oil price shocks. And in the coming years, the answer would have to include carbon intensity.

“High carbon-intensity doesn’t affect resilience much today but increasingly will,” Wood Mac’s Flowers noted. “Assets with high carbon-intensity weaken emissions and ESG metrics so companies should look to reduce exposure to improve portfolio sustainability.”

The future resilience of the oil and gas industry, in other words, is tied to its sustainability efforts. It could be a classic win-win situation if the majors can pull it off.

By Irina Slav for Oilprice.com

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