Not really geothermal but...

Not really geothermal but interesting

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Big oil sees through low prices
Monday, 2 February 2009

NOT many people believed the long-term sustainability of the oil price when it hit $US145 a barrel midway through last year. Now, it seems to Slugcatcher, that not many people believe oil will stay below $US50/bbl for long.

The latest evidence of an oil-price bounce later this year came with the release over the past few days of the December quarter earnings statements of the world’s biggest oil companies.

After the headline-grabbing numbers, which included a 33% net income fall for Exxon Mobil and Royal Dutch Shell’s first quarterly loss in a decade, came the news that most of the majors are maintaining their commitment to expanded exploration programs and field development work.

Shell is boosting its development budget by 5%, despite the December quarter loss, Chevron said it was sticking to a steady budget, while Exxon Mobil is planning a 20% boost to capital expenditure.

The Slug’s interpretation of the increased, or even steady, capital budgets at a time of falling oil price is that the majors are seeing through the current downturn in demand, and are planning to catch the rebound in the oil price by having extra output on line as the recovery kicks in.

This is a different response from big oil to previous price slumps. In earlier times a fall in profit always triggered a sharp reaction that started with budget cuts and rolled across into widespread job shedding.

One reason given for the difference today is that the oil majors have found a way to supplement their decline in revenue caused by the lower oil price. That new revenue source is much higher refining margins, especially for diesel sold in Asia.

But the real reason seems to be that all of the majors subscribe to a belief that the world energy shortage will not get better in the short term, and oil and gas will remain the fuels of choice.

Coal, once a rival to liquid fuel, is having a torrid time with the environmental movement and greener governments. Alternatives – such as wind, tidal, solar and bio-fuels – have failed to fire.

In other words, oil remains the biggest game in the energy world, and the petroleum majors see the current price decline as a chance to cement their positions as the world’s leading energy suppliers – and companies still able to exceed analyst expectations.

Exxon Mobil is perhaps the best case study of a company totally ignoring the price signals coming from the oil market.

A big profit fall for the December quarter was widely expected, but the $US7.82 billion delivered was far better than investors expected, largely thanks to the boost in refining income.

But the real news is a 20% hike in the capital expenditure budget to reach an annual $US30 billion.

This was announced at the end of last year by Exxon Mobil boss Rex Tillerson at a time when he would have had a fair grasp of the December quarter result.

The primary explanation for the “full steam ahead” approach of people like Tillerson is that they want to avoid the mistake of past downturns when exploration and development budgets were cut too deeply, which meant missing the early years of the demand rebound when it came.

Investing now, say some analysts, will mean a quick return to bumper profits when the world’s biggest economies recover and demand rises.

The Slug can’t fault that argument, but he reckons there is a far more basic explanation – Tillerson and his mates running big oil simply do not believe the current price regime, just as they refused to believe last year’s record price peaks.

“The super-majors are investing because they can afford to take a long-term view of the oil price,” is how one London-based analyst described the situation.

It was, perhaps, even better summed up by Shell chief executive Jeroen van der Veer when he said while announcing his company’s December quarter loss: “We are in a world that is structurally short of energy”.

A fair interpretation of van der Veer’s assessment of the energy market is that a structural shortage means higher prices – which is why he’s one of the industry’s leaders who has decided to spend big now even while his company is posting a loss and the oil price is low.