The Decline of the “Supermajors”

On the surface, it appears that the “supermajors” are doing well as oil prices remain high and profits continuously flow in. The big five oil companies—BP, Chevron, ConocoPhillips, ExxonMobil, and Shell—reported a combined $19.5 billion for their second-quarter 2013 profits last week. Exxon Mobil Corp., with a market capitalization of $414.55 billion was only recently taken over by Apple Inc. as the leading company at the New York Stock Exchange. The 2013 second-quarter results, however, also show signs of serious struggle: BP’s profit was down by 25 percent, Chevron’s 26 percent, ExxonMobil’s 57 percent, and Shell’s 60 percent compared to the same period last year. Even though oil prices are $100 per barrel or higher, the supermajors’ returns on investment are not what they used to be as they seem trapped in a “downward cycle” of spending more and producing less. The rise in capital expenditure across the sector coupled with the decline in supermajors’ reserve replacement ratios—a measure of the amount of oil discovered in comparison to production—accounts for this downward spiral.

The integrated supermajor international oil companies were created during the time of low oil prices in the late 1990s with the mergers of the “seven sisters”—Esso, Mobil, BP, Royal Dutch Shell, Gulf Oil, Chevron and Texaco. The seven sisters controlled about 85 percent of reserves in the 1950s. In stark contrast, over 90 percent of reserves today are controlled by national oil companies that used to rely on the technological expertise of the international oil companies to find, refine, and sell their oil. In 2012, national oil companies made up six of the ten largest producers of oil in the world. As most national oil companies have become self-sufficient in technological expertise and project management, they now own the majority of conventional reserves, which are some of the largest pools of oil and gas in easy-to-drill locations. Thus, the supermajors—no longer able to operate in large conventional reserves—are increasingly reliant on costly unconventional and deep-water oil reserves. It should not come as a surprise that oilfield operation costs are now at a record high. Even so, the supermajors are currently responsible for only 25 percent of capital spending in exploration and production: PetroChina, a national oil company, has superseded Exxon to become the world’s largest spender in exploration and production.

The opening up of unconventional natural-gas reserves in North America has made natural gas a quarter of the price of petrol, which is slowly being replaced in petrochemical plants as well as at the fuel pump. For most supermajors, natural gas accounts for more than 40 percent, and for Exxon as much as 50 percent, of production. Yet although the shale boom represents “a feast after years of famine” for the supermajors, the construction of expensive pipelines and liquefaction plants, and the possible glut of gas at the end of the decade might quell their appetite for the time being.

The decline in second-quarter profits for the supermajors has spurred yet another debate about fossil fuel subsidies. Many scholars argue that while such subsidies once supported incremental investment in a risky activity like exploratory drilling, technological advances and high prices of oil in recent years have reduced that risk. As Joseph Aldy of Harvard University states, “the U.S. government effectively transfers by way of tax expenditures more than $4 billion annually from taxpayers to fossil fuel producers.” According to Aldy, by allowing an oil and gas firm to hand off some drilling-related expenditures instead of depreciating them over the economic life of a well, the U.S. government is making an exception for the fossil fuel industry. Reuters reported that in 2011, the big three publicly owned U.S. supermajors—ExxonMobil, Chevron, and ConocoPhillips—paid relatively low federal effective tax rates, which were 13 percent, 19 percent, and 18 percent respectively, “a far cry from the 35 percent top corporate tax rate.” Whereas the U.S. subsidizes oil production, in developing countries most subsidies, which exceed U.S. subsidies, support consumption by lowering prices below market levels, increasing global consumption and hence higher market prices. According to the Natural Resource Defense Council, based on government data from around the world, ending fossil fuel subsidies would save governments and taxpayers $775 billion each year and would reduce global carbon dioxide emissions by 6 percent by 2020. While the fossil fuel subsidy debate ensues, in the meantime, the supermajors will be forced to streamline their portfolios and even “turn away from the oil that they prize so highly.”

Posted by: Sera Tolgay

Sources: ABC News, BP, Chevron, The Economist, Energy Information Administration, ExxonMobil, Financial Times, The Hamilton Project, Natural Resource Defense Council, Reuters, Shell

Photo credit: Great Ball of Fire courtesy of Flickr user nate2b