Dinosaur Petrola

A few weeks ago news broke that Chevron had bought US independent Anadarko for $33bn, the largest oil and gas acquisition since Shell bought BG in 2016, bigger than Total’s acquisition of Maersk Oil in April 2017. The acquisition is obviously done to boost Chevron’s US shale and LNG production, so it’s very much a US-centered affair. It is this passage I want to focus on:

Chevron, Exxon, Royal Dutch Shell Plc and BP Plc largely missed out on the first phase of the shale bonanza, when more nimble independent producers such as Anadarko pioneered shale drilling technology and leased Permian acreage on the cheap.

One of the things which surprises me is how slowly the oil majors are reacting to cataclysmic changes in the oil and gas industry. But their lumbering clumsily about in the US shale plays while nimbler outfits cleaned up is really just a sideshow. The real change is in how the oil majors will do business in future. Gone are the days when a supermajor would turn up in a stone-age society, bung the local chiefs some shiny trinkets, and bring in a battalion of palefaces to exploit the reservoir for the next 25 years. Nowadays national governments control pretty much every sizeable oil and gas prospect regardless of which foreign company holds the licence, and nothing is going to get developed in future without the full cooperation of the government or their proxy in the form of a national oil company. This has been the case for some time now, and the past decade or so has seen a rapid increase in local capabilities, whittling away the added value foreigners bring.

In short, oil companies are becoming less owners of an oilfield than service contractors to the real owners, the government. This is an entirely different business model requiring a flatter organisation with strong local subsidiaries who are able to make decisions and do business according to the peculiarities of the region. Thus far, none of the majors have shown much interest in restructuring along these lines, instead growing ever larger and centralising power with a handful of decision-makers cooped up in a gargantuan HQ back in the home country. I expect it is the mind-boggling revenues still being generated from legacy fields which gives them the luxury of ignoring how the industry is changing.

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7 thoughts on “Dinosaur Petrola

  1. Isn’t the biggest surprise that a $33bn company is in any way “nimble”?

    There are plenty of parallels to the pharma industry (also in that the government is effectively our biggest customer), where the big guys have largely abandoned the losses of early stage development and now just buy in promising projects when the original backers discover they don’t have the financial firepower or expertise to do a big trial.

    At least the successful ones do that. Then there are those that decide to spend billions on American herbicide manufacturers with expected horrendous future litigation costs…

  2. Went to see stage production of “Local Hero” the other day. Other than the oilman having a change of heart, I imagine it was probably pretty accurate in terms of a) ludicrous manner in which money sloshed about and b) the entirely irrational way in which decisions eventually made.

    It was also enormous fun. 🙂

  3. Why would a country with a newly-discovered oilfield sign an oil major, when they can just contract directly with the likes of Schlumberger?

  4. “In short, oil companies are becoming less owners of an oilfield than service contractors to the real owners, the government.”

    Some time ago, there was an analysis of oil & gas development in the US Gulf of Mexico. The multi-year look back suggested that the big winner from offshore development was the US government, which had captured essentially 100% of the net value created, through lease bonuses whether or not hydrocarbons were found, and royalties and taxes when there was a discovery.

    When post-Saddam Iraq leased up oilfields in southern Iraq, the deal terms were reputed to give 99% of the net value created to the Iraq government.

    An analysis of Permian Basin fields has suggested that about 90% of net value created by successful development is captured by the owners of the land.

    Nothing wrong with landowners/governments capturing most of the value of oil developments. But why would oil company investors want to take all of the risk of failure in exchange for a thin slice of the net value from successes? The service contractor model may make more sense for both parties.

  5. The acquisition is obviously done to boost Chevron’s US shale and LNG production

    Meanwhile in UK, Eviro loons dictate Gov’t policy

    How the Energy Minister failed his MOT
    “…Cut to a meeting in my nearby town which the great man was to address. Seeing me – he is punctiliously polite – he came to shake my hand. ‘Julian, great news. Solar power, solar’s the thing. Panels are really cheap. We can put them on roofs . . .’

    ‘Yes, Minister. But you’ll still have to store the energy.’

    For a second, for a revealing second, his face went blank. I realised that he didn’t know. The Minister for Energy didn’t know that you either use electricity at once or you have to store it in a battery or up a hill or . . . well, there are a few options, none of which is very efficient. He had not been briefed.

    He has moved on, leaving behind another ‘renewables good, carbon bad’ parrot, another Conservative minister whose policies will weaken the UK and make the years ahead colder and darker than they need be.

    Which brings me to the Mail on Sunday.

    The ‘fracking tsar’, Natascha Engel, has resigned because the government is ignoring the chance to revitalise the North of England, ignoring the chance to make our industry more competitive, above all and most shamefully ignoring the chance to make better the lives of the old, the poor and the sick who spend more on home heating than the sort of people who infest the corridors of power. And, incidentally, reducing our carbon footprint by a substantial percentage.

    Ms Engel says: ‘We have the evidence, but the only thing that’s stopping a review is the Government. Yet [Energy Secretary Greg Clark] is refusing to budge and time is running out. If the Government continues to listen to campaign groups rather than science, then he is effectively putting an end to fracking in the UK.’ She adds: ‘Firms have invested hundreds of millions of pounds. They did all this on the basis that Government policy would be rational, that it would be scientific. But it’s not.’…”

    Governed by craven fools who care only about keeping their MP job to enrich themself at taxpayers expense.

  6. I expect it is the mind-boggling revenues still being generated from legacy fields which gives them the luxury of ignoring how the industry is changing.

    This isn’t necessarily a function of size, I feel, it’s lack of competition. I have worked for or known a number of small-to-medium sized companies that had a dominant share in a niche market that were run terribly, but it didn’t matter because the money kept rolling in anyway. Until it didn’t, and then every one of them went tits up because management didn’t actually know how to run a business when mistakes cost real money. The oil companies are just rolling in so much dosh that it’ll take a lot longer to get to that point.,

  7. “I have worked for or known a number of small-to-medium sized companies that had a dominant share in a niche market that were run terribly, but it didn’t matter because the money kept rolling in anyway. ”

    Yes, I’ve known a few too. And the rot includes throwing good money on bad vanity projects, PR, donating to ‘good causes’…
    and extravagant office reception areas —’marble halls’,well the bits on show anyway

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