Shell's US$46 billion of capital expenditure last year was more than the GDP of Ethiopia, whose population is almost 100 million. Yet the company's oil and gas production fell 5 per cent, and profits were down sharply.
If shareholders don’t want unprofitable growth, even less do they like unprofitable shrinkage. The oil giant responded by shelving a number of major projects – from drilling off Alaska, to a gas-to-liquids plant in Louisiana – and announcing $15bn of asset sales, as part of plans to reduce this year’s capital spending to a mere $37bn.
But Shell is not alone. On Friday, Norway’s Statoil said it would cut investment and push back its 2020 production target. The chief executive Helge Lund explained: “We are prioritising value creation rather than growing as fast as possible”, as the company delayed plans for an Arctic oilfield and a North Sea heavy oil development.
Meanwhile, ExxonMobil slipped behind Google as the second most valuable company in the United States, after its production fell in 9 of the last 10 quarters.
The supermajors all face similar problems. Their legacy assets are increasingly mature – as their output falls, higher spending is needed to maintain safety. In their new core areas, such as Brazil, Kazakhstan and Russia, financial gains are whittled away by government attempts to claw back the windfall – or, as in Australia, by heavier regulation. BP, Shell, ExxonMobil and Total each lost about 140,000 barrels per day of production – perhaps temporarily – as their stake in Abu Dhabi’s onshore fields expired.
Costs are not rising because fields are growing more difficult – the “end of easy oil” fallacy. It’s more the converse. High oil prices allow expensive projects to go ahead and create a scramble for scarce rigs, compressors and pipelines. But the whole industry is grappling with an ageing workforce. Failure to invest in the next generation in the 1990s now manifests itself in soaring salaries and worrying skills shortages.
What can the big oil companies do? If record spending levels do not lead to growth, then cutting spending and selling assets will obviously cause even faster declines in oil and gas production. That may be acceptable if it is part of a well thought-out plan to transform to smaller, leaner and nimbler entities.
But an elephant on a diet is still an elephant – shrinkage on its own is not a strategy.
The supermajors need to learn again how to deliver major frontier projects. The giant new Kashagan field in Kazakhstan now faces months of delays after a pipeline was corroded by toxic gases. The cost of Chevron’s flagship Gorgon liquefied natural gas project in Australia has ballooned from $37bn to $54bn. BP was almost ruined by the 2010 Macondo oil spill in the Gulf of Mexico.
These kinds of stumbles undermine the supermajor rationale – that only they, with their financial muscle and organisational strength, could execute huge and challenging projects. With the cancellation of a raft of projects in the Arctic and other technological frontiers, the companies themselves seem to have lost some confidence in their ability to deliver.
In deep water – Macondo apart – they have done much better, but here even midsized companies and national oil companies have come to compete with them.
Otherwise, exploration results have mostly been dismal. Nor – having completely missed the initial shale boom then overpaid to get back in - have they cracked the code of operating shale cost-effectively. Perhaps they need to take a chance on decentralisation and create specialist shale and mature-asset divisions.
But shareholders have some responsibility, too. It’s odd to call for spending cuts while oil prices remain at historic highs. Instead of reflexively demanding austerity, perhaps investors should challenge chief executives to explain how they can still grow while on a capital diet.
Robin Mills is the head of consulting at Manaar Energy and author of The Myth of the Oil Crisis
