Yesterday's news (together with today's) can be found on the front page of the
European Tribune and include the following:
- Hurricanes biting into BP's profits
- The majors not necessarily the most successful at exploration
- Aggressive bidding for access to Lybia's newly opened reserves
- Don't forget natural gas
Hurricanes blow hole in BP profits
BP's third-quarter profits will take a $700m battering from Hurricane's Katrina and Rita, the oil company said on Tuesday.
Between them the two weather events have sliced 145,000 barrels of oil equivalent off production compared to the previous quarter.
That's close to 10% of BP's production, so not an unsignificant volume. But BP got good reveiws of their exploration strategy from Wood Mackenzie, an industry consultant:
BP ahead of the field in exploration stakes
BP, Europe's biggest energy group by market capitalisation, has been more successful than competitors at making money through exploring for oil and natural gas, according to Wood Mackenzie, the industry consultants.
"In the past five years BP has successfully chosen the best places to explore and then worked hard and invested up front - paying a fixed bonus if necessary - to become the number one there," said Andrew Latham, Wood Mackenzie's vice-president of energy consulting.
Angola and the deep waters of the US Gulf of Mexico have been the most lucrative places to explore for oil and natural gas in recent years; BP is the number one operator in both.
Petrobras, the largely state-owned Brazilian energy group, came second, proving the potential for national oil companies in making profits out of the difficult and expensive field of exploration. In relative terms, Petrobras has invested two to three times as much in exploration as its bigger international rivals and branched out past its privileged position in Brazil into the Gulf of Mexico and Nigeria.
The big surprise on the list of the top seven is Apache, the US independent, with a market capitalisation of $25bn, less than a quarter of the size of the next smallest company on the list.
Having Petrobras and Apache up there in that list is interesting, as it shows that smaller companies, and companies form emerging markets can be competitive in the game.
from the same article
ExxonMobil's strength has been at the negotiating table. "BP has been drilling for reserves and Exxon has been negotiating for reserves," he said.
But companies have done poorly in replacing reserves. Wood Mackenzie estimates that the industry has replaced only half the reserves it has produced and needs to spend $40bn a year, rather than the current $14bn, to ensure it found a new barrel of oil for every barrel consumed.
That's the big worry these days for the Western oil companies: they are not investing enough to sustain their future production, let alone increase it as would seem to be needed. This comes from a combination of factors:
- one is that there simply are less reserves available to them. Reserves are increasingly located in countries which forbid (Saudi Arabia, Mexico) or make it exceedingly difficult (Russia, Venezuela, Iran) for them to invest;
- the next factor is that reserves are getting more expensive to develop, and the same amount of investment will get a smaller volume onstream today (see this diary about Total's expensive plans for oil sands in Canada and some statistics on increasing production costs);
- the last factor, where oil majors shoulder some of the blame, is that they have been relatively slow to adjust their investment plans to the new oil prices levels. While there are good reasons to do this (they invest for the next 20-30 years, so it makes little sense to take into account short term price variations), there have also been less acceptable reasons, such as the requirement to have strong return on capital even at low prices, and thus a preference to return money to shareholders (via share buybacks) rather than invest in the business.
In this context, it is interesting to see tha lates news from Lybia:
Libya opens up its oil to Asia and Europe
Asian and European oil companies emerged as the big winners of Libya's second round of licensing since international sanctions were lifted two years ago - but many paid an extremely high price for the privilege, raising questions about whether they would be able to recover their costs.
Five Japanese companies - Nippon Oil, MitsubishiCorporation, Japan Petroleum Exploration, Teikoku Oil and Inpex Oil - won rights to develop oil fields in the north African country, which has proved reserves of 39bn barrels but remains relatively unexplored.
(...)
Several Asian state oil companies, keen to slake their countries' thirst for energy, also won rights to explore for oil in Libya, which was off-limits to international companies for nearly two decades. Those included China National Petroleum Corporation (CNPC), Indonesia's Pertamina and Oil India. ExxonMobil was the only US company to be awarded a permit, in contrast to the first round of licensing, when smaller US companies such as Occidental, Chevron and Amerada Hess were favoured.
(...)
The deal represents the first time Libya has permitted its oil to go to an Asian country. Japan's victory in the bidding could be seen as a blow to China, which competes aggressively with Japan to secure energy supplies.
However, Japan paid a steep price to gain access to Libya's resources. Its companies agreed to keep as little as 6.8 per cent of their future production to recoup costs, leaving the rest to Libya. CNPC, by comparison, will keep 28.5 per cent and ExxonMobil 28.3 per cent.
(...)
Tripoli will take in $103m in signing bonuses, a modest amount given the size of the acreage awarded. However, it has secured the vast bulk of any future production from many companies. The high bids suggest that many oil companies see oil prices staying high for a considerable period of time, given the long lead time that any projects would have.
This shows that the global fight to gain access to oil resources is heating up, with a number of new players in the game: the Japanese being increasingly aggressive, the Chinese following suit and India and Indonesia (now a net oil importer) appearing on the radar screens. Oil will go to those that have money, and the USa are not the only ones with lots of dollars around...
It also points out that oil companies ARE beginning to act as if the high oil price environment were there to last. And as an aside here, can we please stop wil the idea that we are "exploiting" these countries? with 75-95% of all income staying in the country, they obviously seem to be able to care for themselves well enough. The oil majors are service providers to them, and paid accordingly, with less and less upside for them in this highly competitive market.
Wood MacKenzie published another report this summer which highlighted the most successful countries for exploration highlighted this interesting tidbit:
"In absolute terms, the biggest successes include Kazakhstan and the deepwater areas in the Gulf of Mexico, Angola and Nigeria," explained Graham Kellas, VP Petroleum Economics for Wood Mackenzie. "Kazakhstan ranks number one in terms of commercial reserves discovered, average discovery size, reserves discovered per well and finding costs per boe. The world class Kashagan find in 2000 is the major factor, however Kazakhstan has been enjoying considerable success since, including the discovery of two other `giant' fields in 2003."
The US Gulf of Mexico (deepwater) ranks number one for absolute value created and second for commercial reserves discovered. Both Angola and Nigeria recorded commercial success rates greater than 25% and score highly in terms of reserves discovered.
"On relative measures such as Full Cycle IRR and value created per boe discovered, there are some interesting results - the Netherlands ranks first on both criteria for example," continues Kellas. "This may appear surprising at first, given that it is an area viewed as mature with limited upside. High commercial success rates, low exploration costs and relatively lenient fiscal terms, however, combine to drive attractive risked economics. In fact, a low Government Take was found to be the most significant driver for generating high value per boe discovered."
That was about the past 10 years. A low "Government Take" is not in the cards for the coming years, I'd say...
But again, the story of this winter is going to be natural gas shortages and price increases feeding into power prices. The Gulf of Mexico is NOT recovering from the Hurricanes, as this graph from the EIA shows:
(Click on the EIA link for lots more statistics).
The oil situation is under control in the short term thanks to the opening up of the Stategic Reserves (from Europe for gasoline) that has kept the market balanced despite the loss of both oil production capacity and refining capacity, and it's hard to tell how long this will last; the gas situation is NOT under control. Lower production does not lead to shortages now, but it leads to winter storage feed-in being less than needed, which puts the risk of shortages during the winter much higher, and fully dependent on the kind of winter we'll have.
This is just the beginning: