Fashion fades, only style remains the same, Coco Chanel said. While US investors were seduced by the fashion for shale specialists, the supermajor oil companies kept to their usual style. But as an era of low oil prices beckons and the shale industry matures, is it time for big oil to re-enter the spotlight?
The shale boom was led by high-profile stars such as Aubrey McClendon of Chesapeake, who died last month, and Harold Hamm of Continental, a leading light in North Dakota and Oklahoma. The supermajors did make some moves in shale, with ExxonMobil’s US$36 billion acquisition of XTO in 2010 the biggest.
But mostly they concentrated on what they felt most comfortable with: long lead-time megaprojects in remote areas and in deep water. Last week, the first liquefied natural gas cargo sailed from Gorgon in Australia, a $54bn venture led by Chevron with Shell and ExxonMobil.
But these were out of fashion: activist shareholders demanded that smaller companies focus on North America, where the shale boom seemed to promise high, quick and low-risk returns. Companies such as Encana and Devon Energy sold their overseas fields, as short-termist investors lost sight of the need for a balanced portfolio, including low-cost, long-life assets.
Now that style may be back in favour. The supermajors have two advantages. Their downstream units, in refining, petrochemicals and fuel retail, long seemed like laggards. But they provide a stream of earnings largely independent of the level of oil and gas prices.
And the large oil companies are present globally and in a range of projects. Steady cash flow from legacy investments can pay for shale drilling – when and if prices justify it. Although the supermajors’ debt levels have grown, they are much lower than the cash-strapped pure shale companies.
Supermajor shares have suffered with the oil price, with ExxonMobil down by 19 per cent since June 2014 and BP, Shell and Total having fallen by more than 40 per cent. ConocoPhillips, which hived off its downstream arm in 2012, has dropped by 53 per cent. But Conoco still has its overseas assets. Companies focused mostly on North American shale have suffered much worse, with Devon losing 65 per cent of its value and Chesapeake down by 87 per cent as bankruptcy rumours swirl.
The Permian Basin in West Texas has proved to be the most resilient part of the US shale oil scene. Who are the two leading drillers there now? Not shale specialists such as Pioneer or EOG, but two supermajors: ExxonMobil, via its XTO unit, and Chevron. Chevron expects its Permian Basin production to rise from 125,000 barrels of oil equivalent today to 250,000-350,000, with up to a quarter of its total output from shale by 2025.
Occidental Petroleum came under strong shareholder pressure between 2013 and 2014 to sell its Middle Eastern assets to focus on US fields, but was unable to close a deal. It must be relieved: Dolphin Energy is a cash cow and while its stakes in Oman and Abu Dhabi may have low returns, they are predictable and robust. Meanwhile, its spin-off California Resources has lost 88 per cent of its value since listing in late 2014.
But to succeed in shale, the largest oil companies still have to blend two different business models: patient, long-term, risk-averse megaprojects with hyperactive, factory-like shale drilling, relentlessly trimming costs – turned on or off within months as the market dictates. They may need separate divisions, as with XTO in ExxonMobil. Shale outside North America, as with Chevron’s growing investments in Argentina, may also play to their strengths.
The greatest fashion icons are able to reinvent themselves for decades. The supermajor oil companies have to find themselves a new outfit for the age of shale without changing their underlying physique.
Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis.
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