Exploring Hydrocarbon Depletion
Page added on May 27, 2014
Despite increased spending, oil majors are seeing flat or declining production as they struggle to replace reserves, according to a recent analyst report.
Exxon Mobil Corp., Chevron Corp., Royalty Dutch Shell plc and BP plc recorded declines in their 2013 production. ExxonMobil reported an average production of 4,175 million barrels of oil equivalent per day (MMboepd), down 1.5 percent from 2012, and Chevron saw its production decline by .5 percent from 2012 to 2013 to 2,597 MMboepd. Shell’s average 3,199 MMboepd of production for 2013 was down 1.9 percent from 2012 levels, while BP saw its production volumes fall to 2,256 MMboepd, or 2.7 percent, from 2012 to 2013.
France’s Total S.A. was the only company to buck the trend in declining production, with average hydrocarbon production in 2013 of 2,299 MMboepd, Zacks Equity research analyst Nilanjan Choudhury said in a May 16 report.
“But overall, most ‘Big Oil’ is suffering from marginal or falling returns even as crude prices stay strong, reflecting their struggle to replace reserves, as access to new energy resources becomes more difficult,” said Choudhury. “As it is, given their large base, achieving growth in oil and natural gas production has been a challenge for these companies over the last many years.”
Rising capital expenses also are hurting the oil majors. Despite capital budgets of anywhere from $25 billion for BP and Total each to the $37 billion and $40 billion that Shell, ExxonMobil and Chevron plan to spend this year, these expenditures are not augmenting output.
Choudhury recommended that oil majors such as ExxonMobil and Shell curb their future spending, noting that indications are appearing that drilling expenditures have peaked, with huge budgetary jumps “likely to be a thing of the past.”
The inability of these firms to generate enough cash from operations to address their rising spending and shareholder payouts has forced most of them to take on more debt.
“Though the situation is no cause for alarm, it does raise some questions regarding the companies’ ability to finance shareholder returns,” Choudhury commented. “Notwithstanding the fact that almost all components of Big Oil hiked their dividends recently, there is no doubt their balance sheets are under pressure from spiraling capital spending and shareholder distributions.”
To maintain production rates, oil companies have had to race to find new reserves faster than the old ones dry up, Bloomberg reported in January of this year. That essentially puts them on a treadmill at which they must run faster just to keep pace – a horrible problem in any business. As a result, majors are making significant investments in costly megaprojects such as Shell’s Prelude floating liquefied natural gas.
The fact that the oil and gas majors entered U.S. shale plays late also has contributed to the problem, according to Bloomberg. Many companies pulled out of the United States to explore in places such as Africa and Asia, leaving smaller companies positioned to acquire North America’s shale assets cheaply. The timing of shale deals has proved difficult for the majors such as ExxonMobil, who acquired XTO Energy Inc. for $41 billion in 2010, right before natural gas prices declined.
Shell announced earlier this month that it would sell its Eagle Ford asset stake to Sanchez Energy. The company has also divested interests in other North American shale plays, with planned divestments for 2014 and 2015 to reach $15 billion, as it seeks to restructure its North America portfolio to enhance profitability.