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Big oil is exposed to falling prices who can survive?

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BRENT CRUDE PRICES HAVE SLUMPED SINCE PEAKING AT $115 IN JUNE

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By John Donovan

The news media is waking up to the potential seismic impact on big oil from falling oil prices. Our headline – “Big oil is exposed to falling prices who can survive?” – is taken from an article by John Ficenec published today by the Telegraph, which poses the question:

Which FTSE 100 oil stocks to hold Shell v BP?

It mentions a prediction by Goldman Sachs “that the price for Brent Crude, will fall as low as $80 per barrel in the second quarter of next year.”

The article points out that according to analysis from Bloomberg “Of the two oil majors, Shell is slightly more exposed to a fall in the oil price as about 30pc of its future projects requires a price above $95 per barrel, compared to 20pc for BP.”

Former senior Royal Dutch Shell executive Paddy Briggs has also taken note of current developments, including “an almost perfect correlation between Multinational Oil company profits and the price of Crude Oil.”

In his own article posted today, Paddy speculates that a Shell/BP merger seems more likely than not.

POSTING BY PADDY BRIGGS ON OUR SHELL BLOG

SHELL AND BP DUSTING OFF THE MERGER FILES?

There is an almost perfect correlation between Multinational Oil company profits and the price of Crude Oil. The higher the latter, the higher the former. Changes within the business operations, cost reduction exercises and other reorganisations and the like, can affect financial performance on the margins. And instituting such changes can give Directors the feeling that they are “doing something” to justify their windfall level remuneration. But, in truth, it’s the traded value of Crude which really drives the dosh. So falling prices are bad for Shell, Exxn and the rest of them Arguably, however, they are good for the rest of us.

There are those who argue that the higher the oil price the stronger the drive for diversification will be. Renewables become more relatively viable if Crude prices are high. But Shell, having established Wind, Solar, Forestry and other unconventional energy businesses got out of most of them despite the rise in Oil prices. Even the (highly questionable) Governments’ subsidies for renewable energy were insufficient to keep Shell in the game. And falling prices make it unlikely that they will return.

One of the drivers of falling prices is the gradual increase in production – especially in the United States – of hydrocarbons (mostly Gas) from Shale. Fracking is changing the face of the energy scene, and not just in America. The US could become self-sufficient in Energy as a consequence, an extraordinary turnaround. The energy business is a classic example of where price is a direct consequence of the interplay of supply and demand. As supply of oil and gas from new non OPEC production such as shale increases the price falls. For the first time for a while the Sheikhs and their friends are not telling us how much we’ll pay for our gasoline!

The prediction of oil price trends is a dodgy old game and one major shock can lead to panic and price rises. That said there is reason to be bearish on oil for at least the medium term. There is an uncomfortable dilemma ahead for the Oil Majors. Unconventional oil and gas production – be it via fracking or by moving into environmentally questionable areas like the Arctic – is expensive. And yet if the reliance on Middle East and other traditional producers is to be reduced then this has to happen. But the bean counters are going to be worried about project viability if the Crude price keeps falling. My guess is that the hurdle rate for investment approval slips negative in many cases at $80 a barrel or less.

Consolidation of the energy sector may be the way forward. Rumours of BP and Shell dusting off the merger files sound logical to me. BP is far from out of the mire of the Browne and Hayward years yet. But come the dawn, and if the lawyers confirm that all the lawsuits are behind them, then a Shell/BP merger seems more likely than not. The opportunity to build a great Europe-based Energy multinational around the strong(ish) foundations of RDS and BP would be attractive – not least to the European Union. The nightmare alternative, by which either or both fall into the hands of Russian, or Chinese or Arab predators is not!

“Follow the money” is never bad advice. And along with “Who benefits” I’d recommend it at this time. The next few years will see major changes, some surprising, to the global energy scene. The power is shifting. The prizes are high! Who will win? We’ll see.

RELATED: Shell BP Mega-Merger?: 29 May 2014

Shell CEO dubious prediction on oil prices: 9 October 2014

1 Comment on “Big oil is exposed to falling prices who can survive?”

  1. #1 Riccardo di Guevara Fabbri
    on Oct 30th, 2014 at 18:10

    Excuse me but how can Shell sell to Pan Ocean Oil Company if Pan Ocean is in the middle of dispute over ownership!?! Festus Aleni Fadeyi is a big thief and has taken Pan Ocean from me and my family when my late father Vittorio di Guevara Fabbri passed away in 1998! Pan Ocean Oil Company belongs to me and my brother as heirs to my late fathers estate! We have the only and real shares in our lawyers offices in Geneva Switzerland and the fraudulent shares which Festus Aleni Fadeyi issued in Abuja must be nuled and VOID! He must be put in jail for the rest of his life! He not only stole our company from us but also causes us internal damages to my family and my self for 17 years and for all that there must be justice!
    Shell nor anyone else has the right to be doing business with Festus Fadeyi or anything to do wit Pan Ocean Oil Company Nigeria!

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