Playground keeps getting smaller for Big Oil
CALGARY -- Anyone out there who doesn't understand the tectonic shift taking place in the world of the big energy companies -- the supermajors like BP, Exxon Mobil and Chevron -- need look no further than Shell Canada.
The company, which is 78 per cent owned by Royal Dutch Shell and in the midst of evaluating the fairness of a $45-a-share offer by Royal Dutch to buy the remaining 22 per cent, put another oil sands expansion on the table this week.
The original plan was to boost production from the current 155,000 barrels a day to 550,000 by 2010. This week, the target was lifted by an additional 220,000 barrels. Shell and its two partners are already staring at a price tag for the current expansion of $12.8-billion, triple the original estimate.
And now it wants to forge ahead with another expansion -- at a new mine -- that will only add billions to the already rich price tag.
What this vividly illustrates are the challenges faced by the big energy companies like Royal Dutch Shell, who are increasingly being shut out of areas where the low-hanging fruit still exists in terms of exploration and development. Make no mistake: The reason it is bidding for the minority interest is for the oil sands exposure.
It's an inescapable fact that the majority of the world's energy reserves are to be found in the Middle East -- a place where Western energy firms are not exactly welcome to set up shop. And if there are places one might deem to be open, such as Libya, either the fiscal terms are too onerous or the political risk is too high -- Iraq, for example.
Venezuela has effectively shut the door to meaningful participation by private sector firms, preferring to host national oil companies.
Then there's Russia, whose bait-and-switch behaviour gets Western companies to pony up the cash to develop rich resources such as Sakhalin, only to leave them on the doorstep holding an empty bag once the tough sledding is over and the cash is due to start rolling in.
Add up all the numbers, as the International Energy Agency recently did, and more than 80 per cent of the world's energy reserves are off limits to Western hands either because of location or because national oil companies are there.
So what's wrong with finding other smaller places to explore and develop? The trouble is that when a company reaches the supermajor threshold, producing millions of barrels of oil equivalent a day, it's tough to add production growth of 10 per cent and add shareholder value in the smaller, older fields around the world. The numbers just don't add up, especially in today's environment of rising costs.
It works just fine for companies like Talisman, which has a knack for making base hits around the world by looking for conventional opportunities not big enough to have an impact on the Shells, BPs and Exxons of this world.
"There are enough modest opportunities for companies our size in rich areas that are still underexplored, like Vietnam, Indonesia or Papua New Guinea," said Talisman chief executive officer Jim Buckee.
The net effect is that it has forced the big players into the technically challenging reserve basins of the world, such as the deep waters off Brazil or west Africa, the Gulf of Mexico and, yes, Canada's oil sands. These areas offer opportunity, but at a hefty price: There are upfront research and development costs to figure out how to get at the challenging stuff below ground, and all the technical development required in order to produce it.
Factor in the high cost of services these days and it's also clear there aren't many firms today that can spend the necessary dollars to go after challenging plays. The successful Jack well in the Gulf of Mexico, which has cost hundreds of millions to drill, is but one example. Even so, the reserves there are nowhere near enough to alleviate long-term supply concerns.
For all these reasons it makes sense that Shell Canada -- soon to be wholly owned by Royal Dutch Shell -- is boosting its exposure in the oil sands. And yesterday, rumours were swirling that BP might be interested in Suncor. BP's share price has been under pressure relative to its peers -- its lucrative partnership in Russia with TNK is on shaky ground -- and it badly needs to reassert itself on the world stage. Buying Suncor would not only give BP a big foothold in the oil sands and immediately boost its reserves and production, it would be just the thing for incoming CEO Anthony Hayward to signal that the guard has indeed changed at the top.
No matter how one looks at the global energy picture, it is increasingly evident that the balance that was tipped for so long in favour of the big, Western-based, private sector players has shifted in the opposite direction toward the national oil companies and the countries that control them. These are indeed challenging times for "Big Oil," even with high oil prices.
