Why Isn't Big Oil Drilling More?

[UpInArms]

http://www.businessweek.com/magazine/content/04_25/b3888039_mz011.htm

It's easy to understand why many Americans are angry with Big Oil. Crude oil that peaked at $42 a barrel and $2-a-gallon gasoline have given the oil companies a Mississippi River of cash flow. And even though crude has dropped 11% in recent days, the forces that have stoked prices, including booming energy demand from China and fears of attacks on oil personnel and facilities in Saudi Arabia and Iraq aren't going away anytime soon.

You would expect oil companies to be pumping more oil from existing wells, drilling new wells in current fields, and boosting exploration budgets. After all, a basic rule of economics is that higher prices bring forth more supply. More output by the supermajors would loosen OPEC's grip on world markets and lower prices. Yet this year, worldwide exploration and production (E&P) spending will grow only 9%, up from the 4% first planned, according to Lehman Brothers Inc. (LEH ). That's a relatively weak response to a 2004 surge that sent oil prices up 30% over the 2000-03 average. Ten years ago, a similar runup would have boosted E&P budgets by over 20%, says Lehman analyst James D. Crandell.

<snip>

Whether mergers are mainly an effect of Big Oil's conservatism or an enabler, they're under more scrutiny now that oil prices are sky-high. The merger wave of 1998-2001 united Exxon with Mobil, Chevron with Texaco, BP with Amoco and Arco, Conoco with Phillips, and France's Total with PetroFina and Elf. Jon Meade Huntsman, founder of chemicals maker Huntsman LLC in Salt Lake City, recalls warning people that mergers would lead to high oil prices. He says costly oil is damaging the chemical, airline, and trucking industries while enriching a handful of giant companies. Says Huntsman: "We've got a monopoly that's in effect more dangerous than during the Rockefeller era" of a century ago.

<snip>

Oil execs argue that bigger means stronger. "Consolidation has given companies the financial strength and technological capabilities to take on bigger risks," says John Browne, CEO of BP, the former British Petroleum. Trouble is, there's little evidence that they're doing so. Far from raising money to pursue opportunities, oil companies are paying down debt, buying back shares, and hoarding cash. Exxon Mobil Corp., for instance, earned record profits in 2003 and ended the year with nearly $11 billion in cash. It then piled on an additional $5 billion in cash in the first three months of 2004.

<snip>

Mergers may have also hurt competition in refining and marketing. When capacity is tight, like now, refiners can hike prices and boost profits by taking part of their capacity offline, says Severin Borenstein, director of the University of California Energy Institute in Berkeley. Although there's no proof they've done so, the risk is greater with fewer players in the market. With joint ventures dominating downstream operations such as refining and storage, the competition's inventories are no secret, critics charge. "You don't need a smoky back room. All you have to do is go to a computer," says Jamie Court, president of the nonprofit Foundation for Taxpayer & Consumer Rights.

Even the closure of a single refinery can cause trouble. When Shell Oil Co. (RD ) said that it planned to shut rather than sell a refinery in Bakersfield, Calif., critics charged it with trying to boost prices by reducing supply. Under pressure, Shell agreed to put the refinery up for sale. It says it has received 22 inquiries -- but still plans to shut it down by Sept. 30 "based on economic viability" if there's no deal.

...more...

Does this behavior resemble the deregulated power providers in California?

[shraby]

1. I'm not sure about now, but

oil companies were drilling wells in Michigan and capping them for future use. There are pockets of oil in the Niagarian Reef that is in the northwestern part of Michigan.

[Trillo]

2. Yes. nt

[phantom power]

3. "basic rule"

interesting claim: "a basic rule of economics is that higher prices bring forth more supply."

That's no rule I ever heard of, and there are obvious exceptions, for instance if there *is* no more supply. Or, if the supplier just decides that they can make more money by keeping the price high.

[struggle4progress]

10. In fact deBeers has kept diamond prices inflated for generations ...

by limiting supplies.

[rangerfan]

4. Actually rig count is up.

6/11/04 U.S. rig count is up 19 from last week at 1,187
6/11/04 Canadian rig count up 17 from last week at 273
May 2004 International rig count was 839, up 7 from April 2004

[mbperrin]

11. Here's a link to worldwide rig counts:

This year, the number has been steadily falling since January.

http://www.bakerhughes.com/investor/rig/pdf/Worldwide1.pdf

Also take a look at 1981: AVERAGE 5621 rigs - now there's a rig count.

[Yupster]

5. Few responses

Living out here in the oil patch, thre are a few responses.

* a 9 % rise is nothing to sneeze at

* oil people look for stable prices. It takes a long time and a lot of money to drill a well. You won't see that kind of investment unless there's a feeling that the price will stay where it will be profitable or them to drill.

* Surging steel prices have hit oil drillers hard -- used pipe is going for a mint right now, and there's a line waiting for it.

[lanparty]

6. Oligoplogy

The fewer suppliers there are, the easier it is to form price fixing agreemants. That is the legacy of the big oil mergers.

It's really VERY simple economics.

[texastoast]

7. Oh, they are drilling

Just not in the U.S. Siberia is where most of the action is now.

[TexasBushwhacker]

8. We've gotten all the easy oil

The oil that was relatively easy to get to has all been pumped out. That was done decades ago using jackup rigs just offshore on the continental shelf. Those rigs have been shut down because the trickle of oil that they still may be able to get doesn't pay for the cost of bringing it up.

Domestic oil drilling has moved to deep water, primarily in the Gulf of Mexico. I'm talking rigs that are operating where the water is thousands of feet deep. The rigs themselves are expensive (many millions of dollars) and they are expensive to operate. Crews have to be choppered out and have to stay there for weeks at a time. That means lots of OT. If anything goes wrong and they have to shut down, they can lose $100K A DAY easily.

I agree that we need to reduce our dependance on foreign oil, but considering it's a big fat polluter, we need to cut down on the use of fossil fuels PERIOD. That means conservation and development of ALTERNATIVE ways to generate energy. The last thing we need is to keep oil cheap. They've been paying $5 a gallon in Europe for years. We need to get used to the idea that oil and its products are going to cost more and develop the alternatives.

[On the Road]

9. For the Moment, All Oil Companies Benefit by Limiting Production

and keeping prices high. It works like a tacit cartel. And exploration and drilling have been held down by low prices for years.

Over the longer term, companies will increase output and look harder for new reserves. State-run companies may have a greater incentive since they are driven by political and economic needs, not just the shareholder concerns.

I don't know what to make of Business Week's observation that institutional investors value earnings smoothness over higher profits. Normally I would dismiss this argument -- if nothing else, the executive team normally receives higher bonuses for higher earnings, and that's enough of an incentive regardless of what investors might think. But oil stocks are driven more by reserves than by traditional methods of valuation, and I don't really understand the industry. Personally, I suspect that things take a while to ratchet up, and we'll see exploration and drilling pretty soon.