Major Casualties | Russell T. Rudy Energy LLC
When oil prices collapsed last November, most industry observers predicted the demise of domestic shale operators. However, according to a recent article in “World Oil”, it is the international majors who are the unexpected casualties.
In order to maintain their economic viability in the new low price environment, the smaller, nimbler, shale operators used loans, hedge contracts, and sales of equity, debt and selected assets. They also slashed operating costs and capital projects.
Conversely, the international majors are involved in complex and expensive projects such as oil sands, LNG facilities, deep water and Arctic exploration and development. These long term projects cannot be turned on and off as easily as plans for a shale oil well can be cancelled. While these mega-projects might remain viable at current prices, future investments might suffer.
Rising OPEC output and continued increases in domestic shale oil production are flooding the market and keeping downward pressure on prices. Michelle Della Vigna at investment bank Goldman Sachs observed “Big oil is today squeezed by two low-cost producers: OPEC and U. S. shale.”
According to Citigroup data, over the last five years smaller companies have held exploration and development costs to $14.47 per barrel. For the same period, these costs for the majors have averaged $29.95, essentially twice as much.
Clearly, majors have the advantages of vertical integration and the critical mass to exploit emerging opportunities in places like Mexico, Brazil and Iran. Nonetheless, in the first quarter of 2015, Total, BP and Chevron all spent more than they earned. Negative cash flow for the five largest majors totaled $3.4 billion, versus a positive of $17.8 billion a year earlier. At this rate some of them will have to further reduce future investments or borrow money to sustain their dividends.
Shell’s Chief Financial Officer, Simon Henry, concludes “The opportunity for us over the next three to four years is to take the costs down and be more selective about new investments.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2015/6/03/opec-s-shale-war-leaves-big-oil-companies-as-unexpected-casualty .
