Global Oil & Gas: “Why the oil industry is bouncing back” – The Economist

bp-plc

BP plc/Rocky Kneten

PROUDLY, they call themselves elephant hunters. They are the geologists who scour the treacherous depths of the Arctic, or Brazil’s Atlantic pre-salt fields, or offshore west Africa, or the deep waters of the Gulf of Mexico, hoping to bag giant oil discoveries that can generate billions of dollars of cash for their firms over a span of decades. In some cases, they get naming rights. The Gulf of Mexico is peppered with fields named after geologists’ wives (risky if they are duds), or their favourite albums, bands, stars and football chants. They are part of the industry’s folklore. The question is, are they a dying breed? 

Several prospective deals announced this month, from the deep waters of the Gulf of Mexico to onshore Iran, suggest that the industry may be shying away from expensive forays into uncharted territory, and taking a more cost-conscious approach to exploration and production. It remains to be seen whether they can maintain their discipline if oil prices recover. But, for now, “they’ve all gone back to the drawing boards,” says Andy Brogan, an oil-and-gas specialist at EY, a consultancy.

On December 1st BP, a British oil major, approved a $9bn investment to install a second drilling platform in its Mad Dog field in American waters of the Gulf of Mexico (it put in the first in 2005). The field was discovered in 1998 and contains up to 4bn barrels of oil and gas. When BP first proposed the new project earlier this decade, the projected cost was $20bn.

Days later some of the world’s largest oil companies, including BP, bid generously for exploration and production blocks in Mexican waters of the Gulf, which Mexico hopes could realise up to $40bn in deepwater investment from companies. Until 2014, private investment in Mexican oil had been banned since the 1930s, so there is a pioneer’s excitement about exploring for oil there. But it is also familiar territory, with some blocks lying just across the maritime border from America.

Adding to the sense of action, on December 7th Royal Dutch Shell, an Anglo-Dutch firm, signed a preliminary memorandum of understanding to develop oil in Iran, despite Donald Trump’s hostility to Barack Obama’s nuclear deal and the possibility of renewed sanctions. It followed a similar deal between Iran and France’s Total last month.

Such forays show that, for the first time since oil prices plunged in 2014, Big Oil is putting its head above the parapet to seek substantial new sources of crude that will tide it through the 2020s. It comes days after OPEC, a producers’ cartel, struck an agreement to rescue oil prices, which executives say has bolstered confidence that the market is stabilising.

what-lies-beneathYet these bullish signals have not brought cheer to the elephant hunters. For years the industry has struggled to cover its investment needs and dividend payments (see chart). It barely broke even in 2012-14, though oil prices at times exceeded $100 a barrel. Now, at half that price, it is having to scrape the barrel to satisfy shareholders who rely on its dividends. The result has been a historic plunge in oil-and-gas investment. It was a record $780bn in 2014. Since then it has fallen by about $340bn.

Oil executives say they are trying to embark on a new investment cycle without squandering money. Tim Callahan of BHP Billiton, an Australian oil-and-mining firm that won the bidding on December 5th for an $11bn project to develop the Trion field in Mexico with Pemex, the state oil company, says the aim is to be “fit at 50”, ie, able to make plenty of money at $50 a barrel—or less.

The 60% cut in the proposed cost of BP’s Mad Dog Two project suggests that there is plenty of fat to trim. Initially the company intended to install a state-of-the-art floating “spar” tailored, in the words of one official, like a “Savile Row suit”. That project was shelved in 2013. The alternative is a standard “off-the-peg” version, though BP promises not to have compromised on safety. It will be the company’s first new platform since its Deepwater Horizon oil spill, also in the Gulf, in 2010. Aware that OPEC’s control over the oil price may diminish, and that longer-term pressures on oil come from climate change and “peak demand”, BP is aiming to ensure that three-quarters of such cost-savings are structural, and that only a quarter of them are subject to cyclical upswings.

There is scepticism about the industry’s ability to keep its belt tight. Share prices of oil-service companies, including offshore-focused ones like Schlumberger, have jumped since the OPEC deal, suggesting investors expect them to be able to raise the prices they charge their paymasters.

BP executives discuss several ways of keeping costs under control, though they admit they are only “scratching the surface” on these. The firm has pulled out of potentially expensive greenfield projects, such as the Great Australian Bight, and opted for better-known territories instead. (Shell, meanwhile, has given up on the Arctic.) BP may not add to its 45bn barrel stock of resources, which at current rates of production could last 52 years. It may replace uneconomic barrels with cheaper ones, but will also draw 15bn of them by 2030.

Executives have been scouring other industries—from Silicon Valley to carmakers—for examples of how to become leaner. That will involve streamlining inventories and manpower. For instance, in parts of America, BP has cut the number of people monitoring wells by three-quarters, using mobile apps instead. It plans to run fibre optics down its wells to “listen to” problems, such as the seepage of sand, far below the surface, thereby forestalling the need for expensive work.

Andrew Latham of Wood Mackenzie, a consultancy, says that as well as cost-cutting, Big Oil’s best bet on a more economically-sustainable future is gas, which can be cheaper to produce and easier to find than oil. There may be still plenty more gas elephants to bag. They won’t, however, have quite the cachet of the oily ones.

This article appeared in the Business section of the print edition under the headline “Fit at fifty—or less”

 

Advertisements

One thought on “Global Oil & Gas: “Why the oil industry is bouncing back” – The Economist

  1. Aw, this became an extremely nice post. In idea I must place in writing similar to this additionally – taking time and actual effort to have a really good article… but exactly what do I say… I procrastinate alot through no indicates find a way to get something carried out.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: