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...