Oil giants only want the cheapest and cleanest hydrocarbons
LNGO BEFORE the tankers fractured the Permian basin, they got to Prudhoe Bay. Stretching over 800 square kilometers of the North Slope of Alaska, an area the size of New York City, it remains one of the most productive oil fields in American history. In 1977 BP began pumping black substance from Prudhoe Bay, from where a new pipeline transported it over 1,300 km of icy desert to the port of Valdez. The project was a triumph of engineering and a testament to PAambition. This month, the British giant achieved another feat: it sold its stake in Prudhoe Bay and other Alaskan oil fields to Hilcorp, a smaller company. When in April it looked like the $ 5.6 billion sale might be in jeopardy, PA said he would give Hilcorp a loan to help close the deal.
PAThe rush to sell his business in Alaska reflects a larger shift. Oil and gas companies, which are releasing second quarter results in the coming weeks, are cutting investment and trying to sell billions of dollars in resources. Even before covid-19 shutdowns affected energy demand and oil company profits, investors were wary of big projects. Now the risk of expensive stranded assets has become more evident. Last month PA and Royal Dutch Shell, an Anglo-Dutch rival, said they would take write-downs of up to $ 17.5 billion and $ 22 billion, respectively, on assets. Oil majors are increasingly concerned with having only the cheapest and cleanest reserves. Getting there will be difficult.
The oil industry faces a fundamental problem. If the price of Brent crude, the global benchmark, exceeds $ 100 a barrel, about 90% of the world’s oil could be extracted with a return on capital of at least 10%, according to Rystad Energy, an energy research firm. Today, Brent is bringing in just over $ 40 a barrel, making it too expensive to produce around half of the world’s oil reserves (see chart 1). Oil prices are expected to rebound with the recovery in post-pandemic demand, but how much is hotly debated.
ExxonMobil, an American giant that remains optimistic about future demand for fossil fuels, has refused to write down its shale assets. The depreciations announced by PA and Shell accompanied revisions to their forecasts for the price of Brent last month. Shell now expects a barrel to cost $ 40 in 2021 and $ 50 in 2022, down from the $ 60 it assumed in its last annual report. PA predicts that Brent will cost an average of $ 55 from 2021 to 2050. Just a few months ago, its central assumption for prices over the next 20 years was $ 70. PAThe outlook for gas prices at Henry Hub, a benchmark for this product, also dimmed, from a long-term average of $ 4 to $ 2.90 per million British thermal units.
For some oil companies owned by petro-states, current prices are high enough to keep drilling profitable, but too low to balance national budgets (see article). Elsewhere, the high costs mean that the oil can simply stay underground. In Canada, only 42% of reserves can be produced with Brent at $ 60 a barrel, a share that drops to 16% at $ 40. The energy required to extract and refine Canada’s heavy bitumen makes its oil sands even less attractive. Angola has adopted tax incentives in recent years to promote offshore drilling, but Rystad now believes Angola’s low prices and relatively high costs will discourage investment.
Supermajors naturally want resources that are resistant to price fluctuations and climate regulations being considered in many countries to discourage the use of the dirtiest fuels. They worked to cut costs. Last year, the average price of oil needed to cover capital spending and dividends from the big five: ExxonMobil, Shell, Total, Chevron and PA– was less than half of what it was in 2013, according to Goldman Sachs, a bank (see chart 2). The pandemic that hit demand has led to further cuts in capital budgets. For some giants, this coincides with a slow shift to cleaner energy. “We are not on the volume”, Bernard Looney, PArecently said the CEO of. “We are talking about value. “
Yet the shift to higher quality assets will be messy. Projects that seem safe one minute may seem in jeopardy the next. In April, Shell announced it would postpone a final investment decision on its Whale oil field in the Gulf of Mexico, considered one of its most promising discoveries of the past decade. Even the American shale, where the big oil companies have poured money, attracted by its flexibility, lower costs and low geopolitical risk, seems riskier. Shale gas was one of the main reasons Chevron depreciated $ 10.4 billion last year. Some frackers fear potential environmental restrictions from Joe Biden, who was the alleged Democratic candidate for president, and the courts. This month, a federal judge ordered that a North Dakota pipeline be drained of its oil by August 5.
While companies search for winning projects, many find it difficult to get rid of mediocre ones. PA is the only supermajor to meet its $ 15 billion divestment target, in part thanks to the decision in June to sell its petrochemical unit, a company that rivals prospects as having better prospects than drilling. Rystad estimates that reserves equivalent to 12.5 billion barrels of oil were for sale in June, excluding shale and tar sands. Of that number, the majors accounted for more than two-thirds of liquids like petroleum and propane, and half of gas.
In the past, finding a buyer for an oil or gas field was not that difficult. Greig Aitken of Wood Mackenzie, an energy consultancy, recalls “a widespread view that prices would hit $ 80 or $ 100” after the 2014 price drop. Even before covid-19, however, buyers were becoming more cautious. .
In China, crackdowns on corruption have made state-owned oil companies less buying as part of a closer scrutiny of foreign deals. Firms that focus on exploration and production have faced their own pressure to increase profits now rather than growth later, given the uncertainty about future demand. Capital investment (PE) Companies no longer have an easy exit strategy for energy investments, as regulatory and demand uncertainty makes it difficult to envision a successful listing or sale to an oil major in a few years. A PE An investor in Houston says it has become increasingly difficult to estimate the long-term value of shale companies, making financiers more reluctant to back them in the first place.
As a result, willing buyers are increasingly difficult to find. Chevron is trying to sell off its stake in offshore blocks in Nigeria, which it first attempted to sell five years ago. The sellers soften the agreements. In May, Total announced a loan similar to the one PA extended to Hilcorp, to help close the sale of its North Sea fields to a PE-supported company called NEO Energy. In May, Shell announced that it would sell its gas assets and pipelines in Pennsylvania to National Fuel Gas Company, a regional company. Wood Mackenzie estimates that the $ 541 million transaction involved fair value for Shell’s producing gas fields, but valued the company’s undeveloped gas acreage at next to nothing.
Some buyers will emerge for the same reasons others remain on the sidelines: The transition to cleaner energy is uncertain and markets will remain volatile for some time. Opportunistic buyers can buy resources as they would an option, which could pay off if demand picks up and prices rise. It is a credible strategy, but risky. In recent months, Saudi Arabia has shown that it can release millions of barrels of crude to gain market share. “Companies will be able to find buyers for difficult resources,” says Per Magnus Nysveen of Rystad. “It’s all about the price. Right now, buyers are negotiating hard. ■
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This article appeared in the Business section of the print edition under the headline “Le fond du tonneau”