Oil Majors Production Figures Looming

23 July 2004

Times Online. Next week a number of the oil majors will announce their earings and production figures for the first half. The Times reflects on what it expects to see: little production growth.

More interesting is what is not happening at these energy goliaths. With the Brent crude price close to $40, we know BP and Shell are making pots of money; a failure by an oil company to display good profits next week would be disastrous.

What is not happening is growth. Most of the oil majors will report flat or falling oil production volumes, with the only significant gains coming from BP because of the addition this year of oil output from its Russian acquisition, TNK-BP.

Strip out Russia, and Deutsche Bank reckons that BP’s output will fall by a couple of per cent. Merrill Lynch believes net oil output at Shell could be down between 4 per cent and 5 per cent in the second quarter, because of divestments, operational problems and falling well output. ExxonMobil is barely growing and asset sales at ChevronTexaco will send output falling, leaving Total the only company that consistently raises the bar.

OPEC’s spare capacity is very slim, the oil majors are keeping spending [for exploration] tight and the oil-producing countries are becoming more, not less, volatile. Expect an exciting ride.

The discussion point should then be: Why? Some, including the Times, will argue that it is primarily a function of the amount of investment the majors make into exploration. Spend more, find more, produce more. That’s an economist’s argument. Spend more, find some, produce some, maybe, is more the geologists’ argument.

Ultimately it will come down to how much extra spending, for how much return, and at what final cost. That is the core of the peak production and depletion argument. It’s not that the world will “run out of oil”; it is that it will become increasingly expensive to find and produce the oil, until the point is reached at which it is not feasible.

We can defer that point in time a bit through conservation, efficiency and development of alternative and renewable energy sources; but the point will come. What I expect we’ll see next week in the announcements are some signposts marking our movement down that road.