Supermajors' resources might be drying up

The value in experience and expertise
Given the reservoir size or the difficult location, development requires extensive engineering resources and expertise. The projects, often referred to as megaprojects, also tend to be large in scope and take years to complete. It can take upward of a decade from discovery to first production for projects that are far from existing infrastructure. Supermajors and only a handful of NOCs are able to bring the necessary resources and experience to bear on these projects. Large independent oil companies, such as Anadarko, Occidental, Apache, and Talisman, are often as equally skilled at exploration and production but also often lack the financial means to sustain development through downturns in the commodity cycle. Balance sheet size and strength affords supermajors the ability to continue investing during the many years the projects take to develop.

In addition, supermajors offer an array of services that IOCs and service companies cannot. IOCs specialise in developing difficult reservoirs or boosting production at mature fields through enhanced oil-recovery techniques. Service companies can also provide similar expertise. However, by participating in the oil supply chain on a global scale, supermajors operate in segments that smaller IOCs and service firms do not. With an integrated model, supermajors can offer governments in search of a partner additional expertise in refining, transportation, and petrochemicals. For countries interested in developing their own oil and gas industry, this expertise has value. This capability can create opportunities in areas such as West Africa, where nations like Ghana have large resource bases but lack experience in development.

Although many NOCs have made strides in recent years, they still are unable to match the capabilities of oil majors. Many governments rely on oil and gas production for funding of social programmes necessary to maintain political stability. During the last year, the collapse in oil prices provided a wake-up call to government leaders when they saw the threat presented by low prices and falling production volumes. The need to continue to develop projects and maintain production from older fields could open the doors to traditionally closed regions. Supermajors can offer a compelling value proposition to governments rich in reserves but poor in production. Iraq is a good example where recently ExxonMobil, BP, and Eni have succeeded in striking deals to boost volumes from currently producing fields.

Accessible but expensive
Accessibility is not the lone issue facing supermajors' quest to increase reserves and production. The remaining available resources in countries considered accessible often have challenging economics. After Saudi Arabia, Canada holds the largest amount of oil reserves in the world. However, the majority of Canada's reserves are in the form of expensive-to-extract oil sands. In addition to the stigma attached to these reserves because of their environmental issues, oil sands projects typically require higher oil prices than conventional production to be economical. Led by ExxonMobil and Royal Dutch Shell, the oil majors have increasingly relied on oil sands in recent years to book reserves. Even though firms booking reserves with oil sands may continue to post attractive reserve-replacement ratios, ultimately returns may suffer as a result of enormous upfront capital costs, higher operating costs, and lower-quality crude.

Other accessible resource deposits fall much higher on the cost curve than historical production. In the United States, remaining resources adequate to interest supermajors are either located in deep-water locations or oil shales or they require enhanced oil recovery (EOR) techniques. Recently discovered fields in offshore Brazil are in incredibly deep water, far from shore, and will require technological and engineering breakthroughs to produce. As supermajors continue to replace production with higher-cost reserves, demand for oil will need to keep prices high enough to make these projects viable. Successful firms will be those that can deliver production efficiently, effectively, and within budget.

Not content to sit at home
Competition for the world's remaining available and accessible resources remains fierce despite the associated costs and risks. To make matters worse for supermajors, in recent years NOCs have begun to expand outside of their native regions. Companies such as Statoil and Petrobras have acquired acreage in regions outside their respective home areas of Norway and Brazil. However, it is the recent acquisition activity of the Chinese state-owned companies PetroChina, CNOOC, and Sinopec that could pose the most immediate threat. Although not on par with Western oil companies in regard to technology and expertise, they are gaining ground. Instead, their competitive advantage relies on cheap government financing and a mandate from their largest shareholder (the Chinese government) to prioritise acquisition of overseas reserves over returns. Chinese firms also benefit from the government spreading goodwill throughout the world, particularly in Africa, through cheap loans to developing nations. To date, however, Chinese firms have run into difficulties closing deals, particularly in West Africa, despite initial agreements. Although unable to close on every attempted transaction, their presence has likely driven up costs for supermajors. African countries are likely to try leveraging offers from Chinese firms to extract better terms from Western firms. In turn, Western firms will have to rely on their value proposition.

A way forward
To combat the issues of accessibility and deteriorating reserve quality, supermajors must focus their efforts on the core competencies. The ability to develop megaprojects sets supermajors apart from other oil and gas companies. These projects require billions of dollars of upfront investment and years of planning but provide years of plateau production levels with little reinvestment. With low debt levels and steady cash flow despite commodity price cycles, supermajors have the necessary financial fortitude to invest throughout the cycle to keep these projects on track. Few other IOCs can replicate that ability. This allows supermajors to be the driving force in the development of capital-intensive liquefied natural gas, oil sands, harsh environment, or deep-water projects.