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Oil majors put the future on hold

Financial Times: Oil majors put the future on hold

“Even Royal Dutch/ Shell, the Anglo/Dutch energy group struggling to build its oil and natural gas reserves base…”

By James Boxell and Carola Hoyos

Published: September 7 2004

The world has less spare oil capacity than it did on the eve of the 1973 oil shocks. Despite that, big international oil companies are ignoring the incentive of record-high oil prices and are not investing in finding and developing new fields.

The trend has become most apparent in the struggling oil services sector. Companies such as Halliburton of the US and Schlumberger, based in the US and France, are being squeezed by ever shrinking margins and have yet to benefit significantly from the usual increase in demand for their services that comes with high oil prices.

Alec Carstairs, Ernst & Young oil and gas practice leader, says: “Despite high oil prices the oil majors are not increasing capital expenditure on various fields. If you go back 20 years, [capex] roughly tracked the oil price, but [today] the level of expenditure has not increased.”

Companies such as BP, the world’s second largest energy group, have decided to woo shareholders by buying back shares and increasing dividends instead of substantially increasing their exploration and production (E&P) budget.

Meanwhile, existing projects that big oil companies have outsourced to oil services companies are beginning to come under severe cost-cutting pressure as areas such as the North Sea and Alaska are ageing and fields are becoming less productive. Even Royal Dutch/ Shell, the Anglo/Dutch energy group struggling to build its oil and natural gas reserves base, increased its E&P budget mainly because of delays and cost increases, rather than to take advantage of new opportunities for drilling.

The reason is in part that the opportunities are not presenting themselves, oil executives say. Lee Raymond, chief executive of ExxonMobil, the world’s largest energy group, recently said he believed that most of the world’s biggest fields had probably already been found and that the next opportunities were likely to come when large investments in countries such Russian, Iraq, Libya and Saudi Arabia become politically possible.

But analysts say the big service companies do not necessarily have the skills in the right place, with their best people choosing to forgo areas such as Siberia and West Africa, another oil frontier.

Stewart Johnston at Charles River Associates, the Boston-based industry management consultant, says: “We are beginning to see a commoditisation of the market. What [established oil services companies, such as Halliburton and Schlumberger] may need to do is rationalise their portfolios and concentrate on high-margin business, otherwise they’re going to be competing with the Chinese and Russians working at half or a third of the cost.” This strategy would also help the bigger companies compete with smaller western players such as Weatherford, BJ Services and Smith International, which have succeeded in drawing higher-margin business away from their larger competitors.

Schlumberger and Halliburton have already begun to shed their non-core businesses and Halliburton may be looking at divesting Kellogg Brown & Root. This, said James Crandell, analyst at Lehman Brothers, would free its oil services side from being dragged down by Halliburton’s other problems, including delays in settling asbestos claims and scrutiny over its cost documentation in Iraq.

Mr Crandell upgraded the oil services sector in August, believing higher oil and natural gas prices and increased spending from independent oil companies would give the companies their long-awaited boost.

“We would focus on companies with strong international franchises with a particular emphasis on the Middle East, Russia-Central Asia, China and also the North Sea, where we are more confident in a recovery.”

Meanwhile, analysts are expecting consolidation among the smaller companies in the sector. Indeed last month, National Oilwell and Varco, both based in Houston, said they would merge.

A revival of the oil services sector is important, not only to shareholders of Halliburton and Schlumberger, but also to the energy sector as a whole. Oil companies have a love/hate relationship with oil services companies: they fear them as competitors, yet rely on them to find and produce oil and natural gas.

For consumers, an unreliable oil services sector could mean oil prices continue to stay high even once oil companies are again ready to pour more of their money into E&P. This could impair world economic growth and lead to shrinking demand for oil, ensuring oil service companies miss out on the boom this time around.

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