Big Oil is in a panic. The global price of crude has fallen further and faster than anyone could have predicted. At $43 a barrel oil is down about 70% from June 2014. Record oil supplies have outstripped demand, and now storage tanks are filling up. By June we might just run out of room to stick all this crude. If that happens $43 a barrel might look great compared with how far oil prices could fall.
It's remarkable that the world finds itself swimming in Too Much Oil. A decade ago Earth was using about 83 million barrels per day. That's grown to 93 million bpd now. Remember back in 2008 when the worryworts were prognosticating that record prices of $147 were just the beginning of a Peak Oil super spike? We don't hear much of them anymore.
I've been thinking about this a lot while compiling my annual list of the World's Biggest Oil & Gas Companies. Many thanks to the good people at energy consultancy WoodMackenzie for providing data on the world's 21 biggest producers. Not only do we have numbers for 2014, but also, for comparison, from 2004. (You can see both figures for each company, and photos of the CEOs and strongmen who run them by clicking through the accompanying slideshow.)
What a difference a decade makes. Back then, these top producers were pumping 64.1 million BOE per day (that is, Barrels of Oil or the energy Equivalent in natural gas). Today they are pumping a collective 80.4 million boepd, an increase of 25%. WoodMackenzie assures me that there's no double-counting going on. The figures represent each company's working interest volumes before royalty payments. All told, these companies account for roughly half the world's crude oil production. There's one thing that has barely changed in a decade: in 2004 the average price of a barrel of West Texas Intermediate was $41.5. As I write this on March 19, WTI is at $43.
All that production growth is far from evenly distributed. Kremlin-controlled
Find out what’s happened to the oil industry--and where it’s headed next.
Do you spot a trend here? Among the biggest oil companies, the vast majority of volume growth has come from state-controlled entities. Compare that with the performance of the International Oil Companies: ExxonMobil has managed to add only 100,000 boepd in the past decade to get to 4.7 million.
Now it makes sense that the national oil companies of oil-rich countries should be able to grow a lot, especially when incentivized by several years of $100+ oil. But what's the excuse for the Exxon's and Chevron's and Shell's not growing? I mean come on, oil production in the United States has surged by nearly 5 million barrels per day in the past 6 years and by 1.4 million bpd in 2014 alone. Natural gas production in the U.S. has increased from 24 trillion cubic feet per year in 2004 to 31 tcf in 2014.
Why haven't the International Oil Companies grabbed on to their lion's share of this growth? Have they just not been paying attention? No it's not that. Keep in mind that as oil and gas fields are depleted less hydrocarbons flow out of them. Average decline annual rates worldwide are on the order of 7%. That means that just maintaining a constant production level requires massive investments in exploration, drilling and pipelines. Just running in place, the supermajors have each been making capital investments of more than $30 billion a year.
Some of those dollars have been directed to the North American boom. Exxon bought XTO Energy for $40 billion. Chevron and Shell grabbed lots of acreage in the Marcellus and Eagle Ford and Permian. BP and Total partnered with
But the shale plays haven't done much for them yet. With massive overhead and plodding decision-making, the majors haven't been able to capitalize on the shales -- because the costs there are simply too high to generate decent a decent return on investment. Shell has lost money in North America for two years. BP plans to hive off its Lower 48 business into a standalone company. Stolid Exxon has resisted injecting big-time dollars into shale, but has at least allowed XTO to operate at arm's length lest they crush its nimbler culture.
Click here to check out the full rankings of the World's 21 Biggest Oil And Gas Companies.
Indeed, the Great American Oil Boom has been led by dozens of smaller, independent operators generating 200,000 boepd or less. And for all their efforts precious few of these companies have generated any free cash flow, instead relying on bond sales and equity raises to fund their drilling campaigns.
And even dipping their toes into the shale boom has hurt the big guys too. According to calculations by Bernstein Research the big integrated oil companies generated Return On Average Capital Employed of roughly 8% a year during the cycle that lasted from 2009 to now. In the previous cycle -- before shale oil was a thing -- the average ROACE was more like 16%. The problem with the American shale boom is that all this new oil simply isn't profitable enough, even at $80 and above.
The Oil Bust Of 2015 has already begun to claim the weakest of these operators:
All this is the long way of saying that the reason why Exxon, Chevron, Shell and Total have not added big volumes of new American oil is because they could tell that it simply would not be profitable enough to do so.
This also explains why the state-run oil giants of Saudi Arabia, Kuwait and Abu Dhabi have no interest in accommodating the U.S. independents by cutting their own output. Saudi Aramco's breakeven costs are on the order of $10 per barrel. The very best American shale plays breakeven at more like $40. Qatar, Kuwait, Iraq and Abu Dhabi have invested tens of billions of dollars (often with the help of those international supermajors) to increase their highly profitable production. Aramco's outlay in recent years has been more than $100 billion. They have no intention of cutting back on their Easy Oil and giving up market share to high-cost American frackers.
This is not to say that America's shale oil revolution will be a flash in the pan. On the contrary, this new source of supply will become increasingly important as those inevitable decline rates take their toll on the big conventional fields of Russia and the Middle East. Indeed, we can expect the supermajors to take advantage of current depressed asset prices to buy up acreage and put it into inventory. They will also be able to bring development costs down by turning the screws on service companies.
It will take some time to work off the excess, but oil prices will recover and the American shale oil industry will mature, find greater capital discipline, and help spur years of future growth for Big Oil.
Meanwhile, a reading of the well respected BP Statistical Review of Energy shows that the age of oil is far from over. Renewable energy sources, for all their hype, contribute just 2.7% of the global energy mix, with wind the biggest piece at 1% of the total. Nuclear power comes next at 4, while hydropower gives us 7%. After that it's all fossil fuels. Natural gas, at 24% and coal at 30%, are both taking market share. But the world's biggest source of energy, at 33% of the total, continues to be oil.
Click here to check out the full rankings of the World's 21 Biggest Oil And Gas Companies.
