The Decline of the “Supermajors”

oil sunset

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for only 25 percent of capital spending in exploration and production: PetroChina, a national oil company, has superseded Exxon to become the world’s largest spender in exploration and production.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

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Guest Contributor William Krist with Dani Litovsky: LNG – to export or not to export, that is the question

oil drilling at sunset
The United States is rapidly moving from being dependent on imported fossil fuels to becoming a major world producer.  We’re sitting on vast supplies of natural gas, and recent technological innovations have made it possible to tap previously unattainable resources.  So what should we do with these new-found riches?  Producers of natural gas, by and large, want to be able to sell where they can get the best price, and often that will mean selling overseas.  But consumers oppose exporting our natural gas, arguing that keeping these supplies to ourselves will keep the price here in the U.S. lower than the world price, and that this will give them a competitive advantage.  They believe this will add more value to the economy and trade account than exporting LNG.  And some environmentalists oppose exports because they believe this would raise the price of natural gas and thereby encourage more production.

From an economic perspective, allowing exports would lead to some increase in domestic prices, but the price of natural gas in the U.S. is far lower than in many other markets, for example, $2.66 per thousand cubic feet on average in the U.S. in 2012 compared to some $10 in the U.K. Somewhat higher prices in the U.S. because of exports would encourage greater U.S. production, but prices in the U.S. would still be lower than in most markets because of transportation costs, and this would continue to give manufacturers that use natural gas a cost advantage.  From an environmental perspective, natural gas is less polluting than other fossil fuels.  Until renewable energy such as wind and solar can meet the world’s energy needs – a prospect that is likely to be at least a decade away – encouraging the use of natural gas probably has a positive environmental impact.

From a trade policy perspective, restricting exports would likely run afoul of World Trade Organization (WTO) rules, and it would weaken our complaints about other countries’ export of vital minerals, which many believe is an attempt by China to gain a competitive advantage at its trade partners’ expense.

The economic impact of allowing natural gas exports is likely to be small, as is the environmental impact.  So perhaps this debate is more like “much ado about nothing.”

(Click here for a paper that sets out these issues in more detail.)

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.

Live Webcast Tomorrow: In Search of Arctic Energy

The Wilson Center’s Canada Institute, Environmental Change and Security Program, European Studies, Kennan Institute, and Program on America and the Global Economy

 present

In Search of Arctic Energy

 

 with

 Charles Emmerson, senior research fellow, Energy, Environment and Development Programme, Chatham House

Zachary Hamilla, principal Arctic analyst, Office of Naval Intelligence

Jed Hamilton, senior Arctic consultant, ExxonMobil Upstream Research Company

Robert Johnston, director, Eurasia Group

Julia Nanay, senior director, PFC Energy

 and moderator

 Jim Slutz, president and managing director, Global Energy Strategies LLC

            As ice continues to melt in the Arctic, previously inaccessible and undiscovered resources are becoming available to the world. Driven by ever increasing energy demands, exploration of the Arctic has exploded in recent years. As the competition for these resources has increased, new partnerships and rivalries have begun to emerge at the Northern Pole. To discuss the expansion of Arctic activity, the Wilson Center will host an event focused on understanding the forces driving the increase in exploration. Our panel of Arctic oil and gas industry professionals will reveal what new techniques and technologies are allowing this unprecedented activity. In addition, Arctic experts will examine what nations can do to protect the environment, increase production, and ensure international cooperation.

Thursday, July 12, 2012

9:00 a.m. – 12:00 p.m.

Woodrow Wilson International Center for Scholars

6th Floor Flom Auditorium

 Please allow extra time to enter the building. A photo ID is required for entry.

Directions at www.WilsonCenter.org/directions

 RSVP to Canada@wilsoncenter.org or here

Limited Seating Available

 

 

Promoting “Green Growth” in the Development Conversation

Last week, an audience at the Wilson Center heard new recommendations from the World Bank on how to get countries to grow green. Their report, titled Inclusive Green Growth: The Pathway to Sustainable Development, calls on governments to “think green when pursing growth policies which can be inclusive, efficient, affordable, and necessary to sustain economic expansion in the years ahead.” It makes the point that sustainable growth is critical to meeting the needs of developing nations, and that unsustainable growth will lead to greater socio-economic problems if environmental and social considerations are not accounted for.

The World Bank’s “Inclusive Green Growth” model recommends using more than just a nation’s Gross Domestic Product (GDP) to evaluate its economic growth. It requires using “case-by-case analysis” to minimize short-term costs and promotes enacting “well-designed” regulations to encourage private-sector development that still protects the environment. The World Bank explicitly states that “green growth is not anti-growth,” and presents a plan that implements policies which will allow for greater development that is also “greener” development.

The model that the World Bank has developed focuses on three main pillars to achieving sustainable development: economic, social and environmental sustainability. Economic sustainability requires tailoring a country’s sustainable development strategies to specific circumstances. Meanwhile, social and environmental sustainability encourages sound decision-making by stakeholders in the hopes of building better partnerships between the public and private sectors to meet “up-front capital needs with innovative financing tools.” This recent report by the World Bank highlights how environmental and sustainable growth will be the key to generating a more prosperous and sound world economy. The Inclusive Green Growth project is so important because it points out the need to change our attitude and approach international development efforts moving forward.

Click here to view the video from the event.

Posted By: Jonathan Sherman

Sources: The World Bank

Photo Credit: 24 Solar Panels courtesy of Flickr user Michael Coghlan

America’s Energy Boom: Is Independence Closer Than We Think?

Economist and oil expert Philip Verleger recently discussed America’s current energy boom and its implications at the Peterson Institute for International Economics.  He is currently a private consultant on energy issues and a former senior economist with the Council of Economic Advisers and the Treasury Department during the Carter Administration.  As an oil and energy analyst for almost 40 years, he says he has never seen anything like the current energy boom that the United States is currently enjoying, emphasizing that the U.S. could soon be a net oil and energy exporterVerleger is not the only one catching on to this development.  In late March, a major article was published in The New York Times highlighting these changing circumstances.

Verleger now recognizes that the U.S. will be a low-cost producer of energy well into the future, projecting that domestic production will have a “50, 70, maybe 80% cost advantage,” subsequently enticing companies to return production back to the United States.  In this new environment, every increase in global prices will now be a competitive advantage for U.S. and its exports moving forward, providing a base for stronger economic growth than many of the other industrialized countries.

For years, many administrations had sought the “high-cost solutions” to energy independence driven by major investments in alternatives, but now we finally have the “low-cost solutions.” In looking at the causes behind this change, he states that major oil companies left the United States and abandoned production, but reduced costs and size of computers allowed smaller companies to compete technologically and develop smaller fields untouched by large companies.  Another contributor was the development of the energy futures markets that stabilized prices and built inventories, enabling investment growth.  Verleger noted the key role of regulators that have mandated fuel economy improvements, the use of ethanol in gasoline, and other environmental regulations.  The auto industry itself has also been a factor, changing business models in the wake of its 2009 “near death experience.” Further contributing to price declines, domestic gasoline demand has been falling between “5 and 6% year over year” as well.

Looking to the future, Verleger is quite optimistic.  He believes these circumstances lay the foundation for a U.S. competitive advantage that will last for at least 10 to 15 years, maybe even 30 years.  He predicts that this phenomenon will add one-half to a full percentage point to the U.S. GDP growth rate through both consumption and investment.  However, he is still cautious on a few fronts.  First, he worries that major oil companies will be unable to compete in this low-cost, low-price environment.  Second, we must significantly improve our infrastructure. Finally, he doesn’t think the U.S. will become protectionist of this advantage through export quotas, but he says that the temptation will be there and will be difficult to fight.  Nevertheless, these changes are likely to strengthen the dollar and trade balances, help to control debt and deficits, and enhance overall economic competitiveness.

 

Posted by: Brian Gowen

Photo Credit: Oil well pump jacks courtesy of flickr user Richard Masoner / Cyclelicious

U.S. Announces Tariffs on Chinese Solar Panels

A New York Times article reported that the U.S. Commerce Department announced on March 20 a decision to impose tariffs on solar panels from China, having concluded that the Chinese government provided export subsidies to manufacturers. U.S. firms that depend on the imports of inexpensive Chinese solar panels were relieved that the tariff rates of 2.9 to 4.73 percent were lower than expected, while American competitors to the Chinese firms were not satisfied. However, the Commerce Department is due to decide in May whether these subsidized Chinese imports can be considered dumping. Should the act of dumping be confirmed, tariff rates will be further increased.

China’s rapidly growing green energy industry is clearly demonstrated by the enormous increase in U.S. imports of Chinese solar panels: from $21.3 million in 2005 to $2.65 billion in 2011. Such a fast rate of growth was made possible in part by government subsidies, which stem from the Chinese government’s concern for greater energy and economic security

The authors noted that some experts have suggested looking at the “trade strategies worked out between the United States and Japan in the 1980s to manage Japan’s rapid rise as an exporter.” However, the plan’s feasibility is unclear because U.S. leverage over Japan at the time was probably greater than U.S. leverage over China today. A trade official offered a different viewpoint – Beijing and Washington need to resolve the situation in a “mutually and globally beneficial way,” instead of taking unilateral action.

Posted By: Pokyee Yu

Sources: The New York Times

Photo Credit: solar panels courtesy of flickr user spanginator

You are Invited – Climate Finance: Innovative Financing Sources for Sustainable Development

      New Rules for Global Finance, Heinrich Böll Stiftung – North America, and the Woodrow Wilson

International Center for Scholars

Present

Climate Finance: Innovative Financing Sources for

Sustainable Development

Introduction

John Sewell, Senior Scholar, Woodrow Wilson International Center for Scholars

Discussants:

Beth Urbanas, Deputy Director, Office of Environment & Energy, U.S. Treasury (invited); Ian Parry, Technical Assistance Advisor (Climate Change and Environment), Tax Policy, Fiscal Affairs Department, International Monetary Fund; Ari Huhtala, Senior Environmental Specialist, Climate Change Team,  Environment Department, World Bank; Liane Schalatek, Associate Director, Heinrich Böll Stiftung – North America; David Waskow, Climate Change Program Manager, Oxfam America

The climate summit in Durban/South Africa ended this weekend with a comprehensive yet unfinished climate agreement. Yet some advances were made in the discourse about providing urgently needed financial resources to deal with climate effects in developing countries.  Financing would come from the industrialized countries and be in addition to existing commitments.  In addition, the added resources will be used to address major development, social and environmental benefits that go well beyond a narrow mitigation and adaptation focus.  With traditional donor countries’ budgets severely constrained, innovative and alternative financing sources for sustainable development are gaining some momentum, inside and outside the climate negotiations context.  This panel will bring together speakers from a variety of backgrounds, including international financial institutions, governments, think tanks and civil society groups.  The panel will focus on some of the concrete financing options on the table for sustainable development that go beyond direct public contributions by developed countries.  These varied proposals include taxes and levies on air and maritime transport, special drawing rights and financial transaction taxes.

Thursday, December 15, 2011 ~ 12-2pm ~ 5th Floor Conference Room

RSVP (acceptances only) to jbaker@new-rules.org

Posted by: PAGE Staff