Unconventional moves depend on safety record

Several years ago, analysts covering the oil industry were raising alarm bells about how the major oil groups would be making money in the decades to come. With conventional oilfields maturing and no sign of the shale gas revolution at that point, there was pressure from shareholders for them to get into renewables. The majors responded by delving into projects to extract biofuels from chicken fat and soybeans. But that phase is over.

The major oil groups found salvation in unconventional oil and gas production. By unconventional, I mean new ways of getting to oil and gas. In conventional production, drilling a hole into the ground is enough to get oil and gas to flow to the surface. And over the years, as that flow slowed, the industry turned to technology to help the fuel along, for example, by pumping in water and carbon dioxide. But it did not seem that alone was going to produce enough to sustain the majors decades down the road.

In recent years, the majors have found a string of other new ways to ensure their relevance into the future. They began to take a closer look at Canada’s oil sands, which took more work to turn into fuel but began to become economic as oil prices rose. They moved into deeper waters and found massive discoveries there. And then came the view that natural gas could increasingly replace oil, fuelling the development of massive liquified natural gas projects in places like Australia. Yet another advance in technology enabled the industry to economically extract gas – and now oil - from shale and other tightly-packed rocks.

Wood Mackenzie, the energy research firm, has come up with some interesting projections about how all this unconventional production will fuel the industry for years to come. From their research:

  • Investment in conventional assets accounted for 63 per cent of the Majors’ total capital expenditure between 2001 and 2005.  The proportion falls to 40 per cent in 2011 to 2015.  Increasing investment in the deepwater (23 per cent vs. 17 per cent) and LNG sectors (18 per cent vs. 11 per cent) makes up the largest difference, with heavy oil/oil sands (9per cent vs. 6 per cent) and unconventional oil/gas (9 per cent vs. 3 per cent) most of the remainder.
  • Typically growth resource themes such as LNG and deepwater are more technically challenging and have longer lead times to first cash flow than conventional projects.
  • The investment cycle now underway will reshape the Majors’ portfolios over the next few years.  By 2016 we expect the proportion of conventional assets by value across the Majors’ portfolios to fall from 48 per cent to 39 per cent of total net present value.  LNG is the biggest growth theme by a distance over this period, rising from 17 per cent to 23 per cent, while deepwater increases from 18 per cent to 19 per cent.
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    All this reshaping of the majors’ portfolios to focus more on these new ways of extracting oil and gas will be good news for the industry in the years to come. Simon Flowers, Wood Mackenzie’s head of corporate analysis, explains:

  • There has been doubt about the majors’ ability to raise production. All of the Majors will be producing at or above current levels in 2020.
  • Mr Flowers notes that this contrasts with the international large market capitalisation peer group – names like Murphy and Apache but excluding BG, which he believes is poised for exceptional production growth through the decade. For them, Wood Mackenzie expects production to be 14 per cent lower in 2020. Part of the difference reflects the fact that the majors are increasingly focusing on resource themes with long reserves life such as LNG, whereas as the large caps are more dependent on conventional assets with front-loaded production:

  • We expect combined production for the Majors to climb slowly to a peak of 24.3 million boe/d in 2017, compared with 21.9 million boe/d in 2011 – a 1.75 per cent compound annual growth rate.
  • It indeed seems the majors have found salvation in technology. This is why they are so determined not to let environmentalists block access to these resources. ExxonMobil has established its own natural gas focused  website to counter criticisms about the impact of so-called fracking technology. The API lobby group is fighting to ensure access to Canada’s oil sands. And so on.

    The problem is that accidents like Exxon’s pipeline break under Yellowstone River tend to undermine whatever inroads are made by the industry and the calls for domestic energy security. This is something the industry has to come to grips with. While no industry has a flawless record, it seems the oil and gas industry has had too many accidents at such a critical time when it is staking its future on access to unconventional resources. Macondo alone is a household name in the US. There have also been issues in shale production. Lately, there have been a string of pipeline accidents.

    If the end result is that access to these new resources are increasingly blocked – as seen by efforts in various American states and in France - the industry must see it has nobody to blame but itself.

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