Wrapping Up Oil Week, and It’s Not Looking Good
31 July 2004
Results from the first week of oil company earnings reports are in; of the super majors, only Total is missing, and it reports next week. Below are two plots of the change in daily oil production from these leading international oil companies and a few others.
It’s a sobering picture. From the second quarter of 2003 to the second quarter of 2004, the combined production from these companies dropped some 437,000 barrels per day. Only ExxonMobil managed a significant increase. At the same time, combined capital spending on exploration and production from those companies has increased more than $1.5 billion.
Companies did not uniformly lose production across the globe. For those who have a presence there, Africa was a prime source of increase.
Russia and the Caspian area are also contributing a great deal. If we factor in BP’s new joint venture with TNK (TNK-BP), it pushes BP into positive ground, with a net increase of 560,000 barrels per day, or 31.6%. Production from BP’s own core resources—the ones it had in 2003—declined the charted 15%.
Then again, there was the decline from Kazakhstan I noted in the ChevronTexaco post below.
Some suggest that this picture of declining production reflects a global conspiracy on the part of greedy oil executives to maintain high prices at a time of increasing need. I don’t think so.
First, the results are uneven, with ExxonMobil, for one, increasing production.
Second, even for companies that posted a production loss, certain regions within those companies saw gains—in Africa, for example.
Third, regional drops in production tend to correspond to areas either known to have peaked, or that have been under production for a long time.
Fourth, companies are spending billions on Exploration and Production. As a percentage of revenue, the top oil companies’ average capital expenditure on exploration and production dropped slightly from 4.16% in 1H 2003 to 3.92% in 1H 2004. Given the increase in revenue—that’s a lot of extra money. In most cases, those expenditures would already have been approved well before the price increase hit. In other words, the execs thought they would be spending more as a percentage of revenue than they actually did because of the pricing windfall.
These results also highlight the increasing power of the national oil companies in various areas of the globe; the increase in supply to meet demand isn’t coming from the companies one traditionally thinks of as “Big Oil”.
I think that what we are seeing is a reflection of just how difficult it is to find major new oil systems in a world that has been drilling for more than 100 years, and that has been heavily explored with increasing technological sophistication for at least 60. Finding and producing more oil is difficult, and getting more so.
At a certain point, this becomes like a game of musical chairs. There are only so many chairs, there is only so much oil. Depletion removes both, some players lose.
The market concerns over Yukos and Iraq specifically, and terrorism in general, are overshadowing the larger fundamental issues about exploration and production. As long as global demand continues to grow, the supply-demand situation will keep prices high—and rising.
The only way out is through conservation, efficiency and multiple alternative sources of energy. None of this is quick. We’ve gotten started—but with nowhere nearly enough urgency and focus.
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