Saturday, November 12, 2011

Is Big Oil Destined to Become Small Oil?

Following the notion that says all good things must come to an end, The Economist provides us with some data and a perhaps a new perspective on the future facing some of the least popular companies: Exxon, BP, Shell.... 

The surest way to make money in the oil business is to sell a lot of it at a very high price. The aforementioned companies are making huge profits right now by selling a lot of oil at a very high price. The Economist reminds us that to sell great quantities of oil, one has to possess great quantities of oil. This graph is provided to raise the question as to how long these outfits can continue to slurp from the trough.

Mighty Exxon doesn’t even make it into the top ten in terms of proven reserves. Shell and BP barely make it into the top twenty.

The past provided good times for the big international oil companies because even when they did not control the fields containing the oil, they controlled the technology required to extract it. That is no longer the case. Most oil is now controlled by national oil companies that have gradually been accumulating their own expertise.

"And the smart ones are arguably a bigger problem for the supermajors, since they are muscling onto their turf. They have pockets deeper than any well. And after years of working with the supermajors, their technical expertise is growing. Norway’s Statoil is a match for almost anyone. Brazil’s Petrobras is developing its own technologies to exploit ultra-deep water. Both are forming partnerships with other state-backed firms."

"And when it comes to discovering new barrels, the supermajors find that smaller and nimbler firms (such as Britain’s Tullow and Cairn and America’s Anadarko) are often better at it. In years gone by the supermajors would typically find four or five of the largest new oilfields every year, says David Branson of Booz and Company, a consultancy. Now they discover one or two."

The one area where the supermajors still have an advantage is in extracting oil from harsh environments. They also have an edge over smaller outfits where large amounts of capitalization are required.

Big oil exists on a slippery slope. When oil prices are high they extract large profits from their reserves and benefit from the rush to find newer more expensive sources. When oil prices fall, they suffer a double hit as the profits from their depleting reserves fall and interest in hard to extract oil dries up. There is also the long-term trend toward obsolescence as others continue to copy or exceed their technologies. Time is not on their side.

In pondering these uncertain future prospects, several thoughts come to mind:

"....creative destruction....survival of the fittest....couldn’t happen to nicer bunch of guys...."

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