Plentiful oil resources and tighter capex alter E&P priorities

• Date: 01 July 2019
• DOI: http://doi.org/10.1111/oet.12721
• Published date: 01 July 2019

LOOKING AHEAD

Plentiful oil resources and tighter capex alter E&P priorities

The rapidly expanding US shale sector is drawing an increas-

ingly large slice of a shrinking upstream capex pie away

from conventional oil and gas opportunities around the

world. This and approaching peak oil demand are leaving

countries as well as companies facing the prospect of

stranded assets—especially if Paris climate change goals are

to be met. In response, many companies are refocusing on

efficiency/cashflow and away from reserve replacement, with

some buying back shares and/or moving into lower carbon

energy forms; while resource-rich countries are modifying

access terms to better compete for dwindling funds.

As US shale production continues to soar, and global

reserves keep rising

1

, oil and gas companies are increasingly

focusing on cashflow, dividends and capital discipline as the

main indicators of value, and less on reserve-replacement,

which had been key in the past. US independents have been

instructed by investors to reign in expenditure aimed at

expanding resource bases this year, and pay off debt. And

among IOCs, ExxonMobil no longer includes reserves

replacement performance in its annual financial report pre-

sentation, while BP stopped giving its executives pay incen-

tives based on reserve replacement in 2016.

The impact has been compounded by concerns about

“peak demand”in the not-so-distant future, driven primarily

by a switch to lower carbon fuels, which raises question

marks over the value of long-term reserves. The UK's Carbon

Tracker Initiative has estimated that some $2 tn in hydrocar-

bon reserves is at risk of being worthless if the world imple-

ments policies in line with the Paris Accord 2c warming limit.

As a result, companies are more focused on gas/LNG;

along with the shorter turnaround and seemingly abun dant

shale reserves, as well as EOR and tie-back options to keep oil

production rising. Consequently, only the highest return major

long-term (mostly deepwater) conventional projects are going

ahead, while some assets have been taken off company books

altogether, including ExxonMobil's tar sands assets in Alberta.

1|NEARER TERM SELL-BY DATES

The switch in emphasis has implications for many resource-

rich countries too, which must be careful about holding out

for punitive terms and putting off investors. Brazil is a good

example, having succeeded in bringing in a great deal of

capital since it relaxed local ownership terms a few years

ago. Those countries without an existing sector need to bring

E&P companies in quickly, or run the risk of not exploiting

resources before demand flattens out—or before shale costs

come down even further, soaking up ever more of the avail-

able capital. All the western majors apart from Total have

established and expanding positions in US shale (following

a number of recent deals

2

; as well as through rapid organic

growth). The majors are introducing scale and integrated

pipeline and refining systems, which is helped to continue

the efficiency improvements.

The shale option means it is easier for oil companies to

add reserves incrementally and as required (with an eye on

prices and demand), and the decline in shale extraction costs

shows no sign of slowing. Around half the number of rigs

now produce well over twice as much shale oil in the United

States as 3 to 4 years ago. The efficiency improvement has

squeezed the oilfield services sector, slashing margins and

revenue—despite the record output. So far, shale oil success

is mostly still confined to North America, although Argen-

tina appears to have considerable potential, and many inter-

national oil companies have positions there. West Asia also

has numerous shale oil and gas projects.

Another attraction of US shale is that there is little

political risk, which is always present when investing in

resource-rich overseas developing countries. This has been

illustrated recently, with new governments In Papua New

Guinea and Guyana, for example, casting doubt on exis-

ting arrangements with companies including ExxonMobil

(in both countries), China's state CNOOC, Oil Search, and

Total.

2|GREEN BUDS

As well as expanding shale positions, some companies are

reducing scale by buying back shares, while also re-focusing

away from upstream. Royal-Dutch Shell, for example, has a

major share buy-back scheme, and will spend less than half

its' capex of $32 bn over the 2021 to 2025 period on

upstream oil and gas. For 2018, 51% of Shell's spending

went on the upstream, 46% on the “transition themes”

16