Op-Ed, New York Times
September 30, 2013
Author: Leonardo Maugeri, Associate, Environment and Natural Resources Program/Geopolitics of Energy Project
Belfer Center Programs or Projects: The Geopolitics of Energy Project
The big international oil companies are going through a crisis little noticed by analysts and the markets. It is a crisis of results and of vision.
Simply put, the majors — companies like Exxon Mobil, Royal Dutch Shell and BP — aren’t growing. They have discovered relatively little oil in recent years despite increasing investment. They also have lost their exclusive lock on the skills that made them indispensable to oil-producing countries.
Several factors are at play. The big companies are gradually becoming producers of natural gas more than oil. In some cases, 50 percent of their reserves, their unproduced resources, consist of natural gas. It might be appropriate to call them gas majors than oil majors.
The problem with this transformation is that it threatens their profitability, which is today still largely based on oil fields that were developed many years ago and whose output is in steady decline.
Natural gas is worth much less than oil. It is often difficult to market, and most of its margins are taken up in the cost of transportation and liquefaction. This is the situation for some of the big discoveries of gas in Australia, for example, that may wind up being marginally profitable at best.
It may also prove difficult to make large profits from other large recent gas discoveries, for example in African countries like Mozambique and Tanzania. Everything needed to develop these finds, including highly skilled people, will need to be imported at very high cost.
On the other hand, the big gas discoveries in the United States have caused the price of gas to drop to a point where it is worth about 20 percent of oil for the same energy output, making many gas projects barely profitable.
The signs of trouble are already evident in oil majors’ profits today, which are far lower than those of seven or eight years ago, taking into account the crude prices at the time.
Let’s take as an example the two biggest oil majors, Exxon Mobil and Royal Dutch Shell.
In 2012, with an average oil price of Brent crude higher than $100 per barrel, Exxon Mobil posted net profit of $44.9 billion. However, in 2005, when Brent averaged slightly less than $55 per barrel, Exxon Mobil’s profit was $36.13 billion, about $42 billion in today’s dollars.
In other words, the price of oil almost doubled from 2005 to 2012, but Exxon profit edged up only a few billion dollars. Shell did worse, posting a profit of $27 billion in 2012 compared to $26.3 billion in 2005.
At the same time, oil majors are struggling to increase their production. In the best cases they are maintaining their levels of barrels of oil equivalent, mainly through increases of far less profitable natural gas. Most majors are producing less than they did in the mid-2000s, with some like BP doing much worse.
The majors have also watered down many of the capabilities that once required countries to turn to them if those countries wanted to develop their oil and gas reserves.
In the 1990s the oil majors began to cut costs sharply, in part by reducing the number of people they employed.
They have outsourced some of their essential functions on a large scale in order to maintain profits. For example, more than 75 percent of the value of the work of exploration and production of oil and gas worldwide is performed by service companies like Halliburton and Schlumberger on behalf of oil companies, not by the giants themselves.