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Oil majors need to buy reserves

March 9th, 2010 · 2 Comments

Exploration is too limited and access to the best field closed (or very onerous at best). Which doesn’t leave many options..
Exxon Lowers Bar, Buys Assets Previously Deemed Unattractive

March 9 (Bloomberg) — Exxon Mobil Corp., BP Plc and Total SA are investing in assets that previously weren’t worth their time or money after oil-rich nations reduced access to reserves and exploration drilling faltered.

Efforts to find new sources of crude and natural gas are failing more often, with San Ramon, California-based Chevron Corp.’s exploration failure rate jumping to 35 percent last year from 10 percent in 2008. Countries such as Venezuela are making it more expensive for companies to develop their resources, if they’re allowed in at all. And previously developed fields are drying up, reducing oil companies’ future supplies, or reserves.

“Their No. 1 problem is reserves replacement,” said Nansen Saleri, chief executive officer at Quantum Reservoir Impact in Houston and former reservoir-management chief at Saudi Arabia’s state oil company. “That’s the elephant in the room, so that’s what they have to address.”

To compensate, major producers are investing in projects they once eschewed, including geologically complex oil and gas fields, called “unconventional” by the industry to distinguish them from the easy-to-get oil and gas of earlier years.

Irving, Texas-based Exxon agreed to buy gas producer XTO Energy Inc. for $29 billion in December, 14 months after abandoning its own drilling program in Texas’s Barnett Shale unconventional gas formation, where XTO gets more than 20 percent of its output. BP, Total and Statoil ASA bought into U.S. shale-gas joint ventures, and Marathon Oil Corp. and ConocoPhillips are investing in unconventional gas in Europe.

More Acquisitions

Integrated oil companies announced almost $100 billion in acquisitions in the past year, up 53 percent from the preceding 12 months, according to data compiled by Bloomberg.

The low-cost, high-profit resources of the past are disappearing, said Ted Harper, who helps manage about $6 billion at Frost Investment Advisors in Houston. “You’re looking at a higher initial investment and a relatively more-muted return on invested capital relative to what you were to find 10 or 20 years ago,” he said.

Exxon sought last year to buy closely held Kosmos Energy LLC’s Ghana assets, including a stake in the offshore Jubilee field, valued at about $4 billion. Major oil companies had chosen years earlier not to invest in the project, said Anadarko Petroleum Corp., a partner in Jubilee based in The Woodlands, Texas.

Risk Appetites

Those companies are now pursuing West Africa fields that previously didn’t meet their criteria for potential profits relative to risk, Anadarko Chief Executive Officer Jim Hackett said in a March 3 interview. Independent producers, which are typically smaller and don’t own refineries or chemicals plants, have a different risk profile, Hackett said.

“We didn’t have the same portfolio that they may have had, so our tolerance for something new was probably a little greater than theirs was,” Hackett said.

Investments by Exxon, London-based BP, France’s Total, Norway’s Statoil and Royal Dutch Shell Plc of The Hague in shale formations mark “a change in the model” after major producers cut back U.S. onshore projects decades ago, Hackett said.

Advances in drilling showed the big oil and gas companies that shale projects, where rocks are fractured to make gas flow, contain enough gas to increase reserves and can be developed around the world, Hackett said.

Doubling Reserves

Shale projects enabled independent producers such as Fort Worth, Texas-based XTO and Chesapeake Energy Corp. of Oklahoma City to double reserves and production in five years while output slid at major oil companies. Independent producers in the Standard & Poor’s 500 index are outperforming their integrated counterparts again this year after rising 41 percent, versus a 4 percent decline for the majors, last year.

Houston-based ConocoPhillips forecast that its output will drop 2.7 percent this year as Chief Executive Officer Jim Mulva seeks to sell $10 billion in assets under his plan to “shrink to grow.” The company’s exploration failure rate rose to 43 percent last year from 32 percent in 2008.

“They don’t do exploration well anymore, or at least they don’t want to,” James Halloran, a consultant at Financial America Securities in Cleveland, said of major oil producers.

Exxon said in October 2008 that it sold stakes in gas fields and a pipeline in the Barnett Shale. The decision came after gas prices dropped by almost half in three months.

Gas Shift?

Leaving the Barnett didn’t indicate any shift in the company’s interest in U.S. gas projects, Exxon spokesman Alan Jeffers said. He said Exxon kept a strong presence in areas such as Colorado’s Piceance Basin, where the company has an unconventional gas project.

Exxon forecasts faster demand growth for gas than for other major energy sources because supplies are ample and gas has lower emissions when burned than oil or coal, Jeffers said.

BP, already the largest natural-gas producer in the U.S., said in a March 2 presentation that the heating and power-plant fuel will be a key source of growth for the company in the second half of this decade.

Total said in January it would spend as much as $2.25 billion for a stake in Chesapeake’s Barnett Shale assets. The deal provides a chance to learn about shale gas and will continue to produce for many years, said Phenelope Semavoine, a Total spokeswoman.

Fields that were long ignored also are getting a fresh look. Exxon said in January that it will inject nitrogen and other gases to revive production at the Hawkins Field, a development east of Dallas that started pumping oil 70 years ago. Gas injections will force crude to the surface, squeezing an additional 40 million barrels of oil out of the field and extending its life by 25 years, Exxon said.

Tags: Natural Gas · Oil

2 responses so far ↓

  • 1 NW // Mar 9, 2010 at 7:54 pm

    Sounds like everyone needs to keep any eye on InterOil and the HUGE reserves they have encountered with Antelope 1 & 2…… go gettem IOC

  • 2 rory mcgowan // Mar 9, 2010 at 10:18 pm

    Eni was shut out in Uganda will they be back to Interoil? Conoco looks rip they could use a sure thing baddly.