Big oil companies find it harder to turn a buck

Judging by pump prices, drivers might think oil companies were rolling in profits that only move higher. Lately, though, the big boys in the global oil industry are finding that earning a buck isn’t as easy as it used to be.

Royal Dutch Shell, for instance, just announced that fourth quarter earnings would fall woefully short of expectations. The Anglo-Dutch energy giant warned its quarterly profits will be down 70 percent from a year earlier. Full year earnings, meanwhile, are expected to be a little more than half of what they were the previous year.

The news hasn’t been much cheerier for Shell’s fellow Big Oil stalwarts. ExxonMobil, the world’s largest publicly traded oil company, saw profits fall by more than 50 percent in the second quarter to their lowest level in more than three years. Chevron and Total, likewise, are warning the market to expect lower earnings when fourth quarter results are released.

What makes such poor performance especially disconcerting to investors is that it’s taking place within the context of historically high oil prices. The price of Brent crude has been trading in the triple digit range for three years running, while WTI hasn’t been far off. But even with the aid of high oil prices, the supermajors haven’t offered investors any returns to write home about. Since 2009, the share prices of the world’s top five publicly traded oil and gas companies have posted less than a fifth of the gains of the Dow Jones Industrial Average.

The reason for such stagnant market performance comes down to the cost of both discovering new oil reserves and getting it out of the ground. According to the International Energy Agency’s 2013 World Energy Outlook, global exploration spending has increased by 180 percent since 2000, while global oil supplies have risen by only 14 percent. That’s a pretty low batting average.

Shell’s quest for new reserves has seen it pump billions into money-devouring plays such as its Athabasca Oil Sands Project in northern Alberta and the Kashagan oilfield, a deeply troubled project in Kazakhstan. It’s even tried deep water drilling in the high Arctic. That attempt ended when the stormy waters of the Chukchi Sea crippled its Kulluk drilling platform, forcing the company to pull up stakes.

Investors can’t simply count on ever rising oil prices to justify Shell’s lavish spending on quixotic drilling adventures around the world. Prices are no longer soaring ahead like they were prior to the last recession, when heady global economic growth was pushing energy prices to record highs.

Costs, however, are another matter. As exploration spending spirals higher, investors are seeing more reasons to lighten up on oil stocks. Wherever oil producers go in the world these days, they’re running into costs that are reaching all-time highs. Shell’s costs to find and develop oil fields, for instance, have tripled since 2003. What’s worse, when the company does notch a significant discovery, such as Kashagan, production seems to be delayed, whether due to the tricky nature of the geology, politics, or both.

Shell ramped up capital spending last year by 50 percent to a staggering $44 billion. Oil analysts are basically unanimous now in saying the company needs to rein in spending if it hopes to provide better returns to shareholders.

Big Oil is discovering that blindly chasing production growth through developing ever more costly reserves isn’t contributing to the bottom line. Maybe that’s a message Canada’s oil sands producers need to be listening to as well.

– Jeff Rubin, Jeff Rubin’s Smaller World

9 Comments on "Big oil companies find it harder to turn a buck"

DC on Mon, 3rd Feb 2014 11:28 am 



The oil cartel could not dodge EROEI forever. They had a good run, the US govt paid for the theft of the worlds oil, AND backstopped oil corporations with trillions in dollars in subsidies. It worked for a while, not for much longer. Cracks are beginning to appear and as EROEI creeps ever downward, dollars will cease to be a good measure of, well, anything. Dollars always were a poor measure of how to price oil and the ‘market’ never did anything like a proper job of it. But when oil was regarded like an infinite resource, like some even here do, who cared about EROEI? No one, most still dont.

Shell and Exxon are spending ever more money and getting ever less back for it. I wonder if they genuinely dont know why it was easier to make money in the past, and why it harder now, and going to harder in the future? Maybe privately, they understand perfectly, or maybe they are as clueless as the shills they hire to do PR for them, like D. Yergin. Who knows? Oil corporations rarely share their true insights with us mere mortals.

The real question should be-what is the ‘real’ cost of a Barrel of 10:1 EROEI oil? 5:1? 3:1? Pretty soon, they are going to conclude that costs that bounce around $100.00 a barrel +/- just aren’t cutting it anymore. They will push for big increases in the public subsidies the receive, as well as push for big increases in the market price. The small problem that the increases they want and need to support there futile quest for cheap and easy oil will crush the drive- shop-consume-waste-oil economy they need firing on all 12 cylinders just to keep them afloat. What choice do they have?

Mr Rubins suggestion that they cut back on exploration to give ‘shareholders’ more profit, but that is quaint and naive. If they stop exploring and ‘producing’, then they have nothing to sell. If they do, the crude measure of dollar profit will keep going down as EROEI relentlessly eats away at the oil cartels dollar profits.

So how much longer before its not worth extracting oil anymore, no matter what the cost?

rollin on Mon, 3rd Feb 2014 12:10 pm 



Sounds like poor management is running up against mother nature (geologic and location constraints). The big public oil companies will have to learn how to better manage their exploration and development costs in order to meet the new paradigm of diminishing returns – or close their doors.
No mention of the state run and small companies here, so it only covers a part of the full picture.

Davy, Hermann, MO on Mon, 3rd Feb 2014 2:26 pm 



This is nothing new to us on this site. Higher cost, diminishing returns, and lower production leaving the big boys not so big. The same is true for the state run companies and maybe more so because of the typical inefficiencies associated with state run organizations. All the hype is being beaten down by reality. Follow the dollars with these characters and you will find the truth.

CAM on Mon, 3rd Feb 2014 3:21 pm 



Well, the major oil companies are now finding it so costly to find and develop what oil remains, so they are starting to cut back on exploration. Think of the implications for “Peak Oil”. The descent from “Peak” could be far steeper than anyone has imagined! And, if the major oil companies have become intimidated by the cost (EROEI), what about national oil companies (think Mexico/Brazil etc.). These companies do not have endless resources and will also at some point determine that further exploration is too risky. When equation is ($ for exploration)+ (Profit)=(oil too expensive for anyone to buy) it will all be over, perhaps much quicker than anyone thought possible!

Meld on Mon, 3rd Feb 2014 4:54 pm 



This is just the start of the story. Within a few years these major oil firms will be getting bailouts because they are too big to fail.

It’s an interesting thought experiment when you think about it. is it better to

a) Let the companies go bankrupt and cause a huge global oil crisis, like ripping a plaster off

or

b) print money and give it to them (maybe even nationalise) thus using money that could be spent on other sectors to keep a zombie company afloat.

a) will lead to massive oil price rises
b) will lead to mass inflation that will probably also include oil price rises

Hmm…..fuck haha

rockman on Mon, 3rd Feb 2014 5:57 pm 



Meld – Where do I get my check? LOL. First, US Big Oil isn’t too big to fail by anyone’s standard. The only meaningful impact they could have is in the Deep Water GOM. As far as onshore US Big Oil became irrelevant decades ago. In effect they’ve already failed per se.

Second, probably the best the remaining oil patch might expect is a reduction of fed tax. Take the extreme: no fed tax on all exploration/production profits. But that would just allow a bit of economic incentive. But I don’t see any prospect of the gov’t funding ff development: if the free market economics don’t justify drilling tossing free money at won’t.

The only “too big to fail” aspect would be the loss of shareholder equity. And a large portion of Big/Little Oil ownership is in the hands of retirees including millions of union members. When that day comes I suspect the political pressure will come from that quarter.

Once you back out the old heritage fields, Big Oil isn’t a factor in the development of new US ff reserves. Little Oil is the driving force here. Unfortunately many Americans can’t see that because they only see Exxon, Shell, Chevron, et al gas stations and think that’s the face of US oil/NG development. They don’t see Devon, Chesapeake or EOG gas stations. But it’s these companies that have driven the US oil boom. Between the $1 billion lease and 185 mediocre Eagle Ford wells on that one property Shell Oil lost $billions on just that one project. US Big Oil was never going to come to the rescue. Little Oil pubcos are trying because Wall Street demands they add reserves.

And what about Little Oil privcos like mine? Screw you…we ain’t your momma. We’re only in it for a good profit. LOL. We stopped chasing NG when the price fell. And today there is a very limited number of economically viable conventional plays. We aren’t in the business of supplying the country with ff that create marginal profits.

If the feds ever try to do anything to enhance oil/NG development it will have to focus on US pubcos. But at the end of the day throwing fed money at this problem won’t fix it IMHO.

Northwest Resident on Mon, 3rd Feb 2014 7:57 pm 



“..throwing fed money at this problem won’t fix it IMHO.”

That’s right. If it would fix anything, then the FED would be printing those dollar$ non-stop, throwing them from rooftops and dropping them out of drones onto the oil fields. The only thing that FED bozo-bucks are good for these days is buying FED debt, and even that usage is wearing thin.

george on Mon, 3rd Feb 2014 8:25 pm 



the red queen is alive and well

Makati1 on Tue, 4th Feb 2014 2:37 am 



George, I think she is showing her age and is approaching a massive heart failure. 2014? 2015? Soon, I thunk.