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Big Oil Should Rediscover Adventurous Youth


The Source

March 3, 2010, 4:39 PM GMT

Getty Images: A Shell refinery in California.

By James Herron

It is a reflection of just how far big oil companies have moved from the wildcat frontier operations of yore that nowadays, when they want to impress the market, they bang on about cost cutting and rationalization.

BP’s strategy update Tuesday was the latest example. It sought to wow analysts by promising to boost annual profits by $3 billion within three years through sexy measures such as, “better planning and execution, improved contractor management,” and so on. BP certainly didn’t knock anyone’s socks off with its promise of annual output growth of 1% to 2% and the announcement of a modest deal giving it access to Texas shale-gas reserves discovered by someone else. [See our coverage here.]

BP’s rival Royal Dutch Shell is likely to offer a similarly workmanlike strategy update on March 16, focusing on how its internal restructuring will improve its bottom line. Shell’s output growth in the coming years largely depends on the success of complex, high-tech ventures like Pearl — a vast chemical plant that will convert natural gas to diesel fuel in the Qatari desert.

Contrast the performance of the top two U.K.-listed oil companies with the next three on the list.

BG Group expects to increase its oil and gas output by a whopping 167% to 1.6 million barrels equivalent a day by 2020 on the back of spectacular exploration success offshore Brazil. Tullow Oil is developing major new oil resources in virgin territory offshore West Africa and in Uganda, doubling its share price in two years. Cairn Energy will almost quadruple its production this year following the startup of its big oil discovery in India and is gearing up for a major frontier exploration campaign offshore Greenland.

These companies did not have some secret ability to divine the location of oil, they have simply taken more risks on exploration in unproven areas than their larger cousins.

According to Bernstein Research analyst Neil McMahon:

“The single biggest failing over the past decade…has been the abandonment of exploration, the essence of what has made these companies so successful over the course of their history.”

Believing they could profit from mastery of political risk by operating in countries like Russia, or engineering risk at projects like Pearl, major oil companies have walked away from the geological risk of pure exploration, McMahon said, adding:

“The phrase ‘elephant hunting,’ which in the past was associated with the exploration and discovery of fields with a billion or more barrels of reserves, has been replaced with ‘big cat herding,’ which itself could easily be replaced with ‘fluffy bunny corralling’.”

They exacerbated the problem by laying off swathes of experienced staff during the last round of cost cutting during the industry downturn of the late 1990s and early 2000s. When the oil price rebounded forcefully after 2003 they were left playing catchup and found themselves shut out of many of the basins yielding the biggest new discoveries today.

BP and Shell can be found today making big exploration pushes at the margins of established oil regions — deep water Gulf of Mexico for the former, offshore Alaska’s North Slope for the latter. BP found a “giant” new oil field in the Gulf last year, but it had to drill the world’s deepest oil well to get there. Finding and producing oil in the Arctic circle will also be tough and expensive.

If they want to recapture their past glories, BP and Shell need to get out there and start rolling their exploration dice again.


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