Shift in Focus for Large Oil Companies

I read an interesting research report from Credit Suisse (CS).  Over the past several quarters, the international oil companies (IOCs) have communicated a shift in their upstream strategies from offshore to onshore.  Their focus will be on better returns, returning cash to shareholders and capital discipline over pure production.  It is quite a departure for the IOCs.  Capital expenditures have been high, but without the price of oil moving higher, well economics deteriorate.  Essentially, the older wells and profitable newer horizontal wells have been, to some extent, subsidizing the large capex wells. Add to that, the blow out of the BP Macondo well, which illustrated the tremendous additional expense and loss of life, one of these super wells can cause.  Again adding to that, litigation has further eaten into the profits of the corporation.  With costs coming down on the the terrestrial side, due to single pad, multi-wells, horizontal drilling and hydrofracturing, it seems like a no-brainer to shift to a more predictable, safer earnings stream.  The shareholders have seen enough and have said that enough is enough, forcing the HQ to rethink its strategy. 

So what has led to the deteriorating well economics?  According to CS, strong crude prices have not been enough to lead to strong financial results for the IOCs for four reasons: (1) governments taxing oil price windfalls, (2) decline in high margin production notably of legacy North Sea assets which affected the European Majors to a greater degree, (3) cost inflation particularly in LNG/deepwater and (4) weak downstream conditions.  As a contrast, shale economics work down to $70 per barrel of West Texas Intermediate (WTI).

The implications here are enormous.  The deepwater drilling, while resulting in larger reservoirs than typical onshore reservoirs, cost too much.  The shift from deepwater to land will mean that in order to replace the potential production loss, more wells will need to be drilled to continue to increase oil production.  This will continue to put stress on employment (a good thing - the need for more labor) and on the land (not necessarily a good thing - hydrofracturing fluids will need to evolve to safer fluids).  If I were a CEO of one of these behemoths, I would be looking to deploying some, if not all, of a corporation's stash of cash to renewable energy solutions.  Because as we have seen, peak oil is now (as defined by affordability), people are increasingly purchasing energy efficient internal combustion engine cars, hybrids, and electric cars.  This shift has resulted in less oil consumed by the US, only to be offset by increasing demand in faster economies.  We are only buying time.  If we don't develop new sources of energy now, the alternative is...     

Zero-waste, Zero-energy, Zero-carbon: trends on the way

The zero-waste, zero-energy and zero-carbon movements are afoot.  While these wishes may be impossible to attain; just moving towards they goals will produce staggering benefits. 

With the constant bombardment of degrading environment articles, people are beginning to respond by opening their pocket books.  Minnesota and Minnesotans are moving aggressively into low energy, lower waste, lower carbon areas.  Xcel Energy, Minnesota’s largest utility, recently let us know that it has exceeded its goal of selling less electricity and natural gas in Minnesota for the third year in a row.  This is quite a feat with the recent two brutal back-to-back winters.  How was this done?  Xcel has pushed hard on electric bulb replacement, energy audits, and other energy conservation programs.  For example, I recently took advantage of an LED program, buying 21 Cree LED light bulbs that were partially subsidized (about 50%) by Xcel.  The LED bulb price broke my participation price of $5/bulb.  With Xcel’s subsidy, the price was $4.97/bulb.  I will be analyzing the savings through my energy bill.   According to Xcel, the light bulb program has accounted for a quarter of the conservation gains among residential consumers.  I would encourage all of you to start this replacement program.

Another trend is beginning to take form – the use of biodigesters.  Biodigesters are increasingly used in the farming community to generate electricity from manure.  But, according to the StarTribune, St. Louis Park, MN may become the home of a new community development that is powered by organic waste via biodigesters.  I have written in a previous blog about waste – specifically, landfills and leach fields and how they are constructed.  With our water tables sitting below these sites, I believe that we are not doing anywhere near enough to develop alternative solutions (more on this in the next blog).  This community development may be that first giant step in the right direction.  Once the city of St. Louis Park adjusts its ordinances, the project can be entertained.  The developer would start with an anaerobic digester.  An anaerobic digester is a closed-system facility that uses bacteria on biodegradable material to break it down into methane.   The methane would be used as a fuel source to power an engine that generates electricity.  In this example, the patented process would be sealed with an auger that would slowly turn the waste into biogas within 21 days.  The developer would then include geothermal, solar, and wind as additional parts of its zero-energy goal.  And just in case, they would be connected to the grid.  We need to take risks like this to see if these technologies are finally in the take off trajectory.