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ResourceInvestor.com: Peak Oil Passnotes: BP and Shell Show Failures of Corporate Model

EXTRACT:  “…make no mistake; the age of the energy super major is drawing to a close. Place your bets elsewhere.”

THE ARTICLE 

By Edward Tapamor
03 Nov 2006 at 12:38 PM EST

PARIS (ResourceInvestor.com) — If it were possible to have never ending economic growth something very difficult would have to happen. Basically we would need a never ending supply of resources and a never ending supply of capacity in which to expand.

These kind of economic neo-classical laws simply do not work and two of the companies who are finding out first are the oil companies Shell [NYSE:RDS-B; LSE:RDSB] and BP [NYSE:BP; LSE:BP].
 
Shell has been stumbling around the world trying to find extra production since the turn of the century, and well before that too. It has indeed managed to find some amazing new deposits of oil and gas, most notably the Sakhalin projects in Russia, notably Sakhalin2.

However the most interesting thing about Sakhalin 2 is the amazing engineering feats required to extract the gas and oil from underneath the somewhat chilly terrain. It is a testament to the workers at Shell that they have managed to extract oil and gas from a region so amazingly cold.

Of course the reason Shell needs to go to a region so remote, both physically and politically, is because it cannot find large deposits elsewhere. Quarter for quarter, Shell has consistently tried and failed to increase its production by any significant amount. Having produced as much as 3.96 million barrels per day in 2002, it produced 3.5 million barrels per day last year and looks set to produce something like that in 2006.

But now the Sakhalin project appears to be showing signs of strain as the Russian government, ready to act, have stuck in the knife to the proposed doubling of costs by Shell from $10 billion to $20 billion. Something which would delay the payout for the Russian state on whose land the deposits lie.

“I am almost certain that the proposed size of overruns will never been approved, because it was partially caused by the mistakes in the management of the project,” said Andrei Dementyev, deputy industry and energy minister this week.

Of course in the meantime Shell have been producing bigger and bigger profits, sizeable returns for shareholders and have commenced, like BP and so many others, a share buyback scheme.

But what would Shell’s share price be like if there had been no great price increase in the barrel of oil. Or what would it be like if they had not bought their own shares to prop up the price? The effective self-liquidation of share buybacks are only temporary measures intended to give shareholders extra returns without actually giving the money away as dividends.

On the other hand BP have set about trying to prop up their similarly failing model in a different way. The company entered into a joint venture with Russia’s TNK and slashed costs in the United States, after its purchases in the country in the 1990s. Both are coming back to haunt them.

Whilst BP now produces around 4 million barrels a day a quarter of that comes from TNK. Without TNK the fortunes of BP would be closing in on a par with Total of France [NYSE:TOT], profitable but hardly setting the world alight.

The company’s cost cutting strategy in the United States led to the deaths of fifteen workers and serious injuries to another 180 at Texas City, something BP estimates will cost it over $2 billion. That may end up being a conservative estimate.

Despite all the new technology, all the new practices and the amazing work undertaken by the ordinary workers at both companies, the model they pursue is flawed. The same can be said of all the other major oil companies around the world with only Italy’s Eni [NYSE:E] an exception.

So called ‘organic growth’ that we are promised so often by companies, simply has not occurred. Even Exxon [NYSE:XOM] has had to buy other companies – Mobil the obvious one – to prop up production.

We will look more closely into these companies in the weeks and months ahead. But make no mistake; the age of the energy super major is drawing to a close. Place your bets elsewhere.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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