Oil majors evolve and emerge stronger

Tom Ellacott, head of corporate research at Wood Mackenzie, highlights how oil majors have repositioned themselves since the 2014 oil price crash, and how they will emerge stronger from the market downturn.

He said that despite severe pressure on finances and low oil prices, majors have seized the moment during the downturn to adjust their business models. Today, their prospects are markedly improved with high-graded portfolios, improved production profiles, and more resilient future cashflows.

Oil majors adapt

First, the majors reacted to the industry downturn by selling non-core assets – some USD27 bn worth, such as Shell’s disposal of Canadian oil sands assets. The assets divested were typically low margin or peripheral upstream assets.

Secondly, the majors have dominated investment decisions approved since 2014 and account for two thirds of reserves sanctioned for extraction. “Final investment decisions (FID) are happening because of lower costs, much of it cyclical but with structural elements; project re-scoping and re-engineering are showing the way forward,” said Ellacott. However, more work is needed to create a pipeline of big, commercial deepwater projects.

Chevron, Shell and ExxonMobil also have exposure to US tight oil and are all ramping up spending, said Ellacott. Tight oil and unconventional gas will become increasingly important to these three companies – contributing at least a quarter of ExxonMobil’s total output by the mid-2020s.

Acquisition trail

Mergers and acquisitions (M&A) seen in the sector have shared traits. The deals have been made to bolster existing portfolio strengths, and include low breakeven/long life assets.

Shell’s acquisition of BG Group in 2016 was the standout transaction, which closed at approximately USD82 bn. The deal positioned Shell in prime Brazil oil projects while expanding its liquefied natural gas (LNG) business.

ExxonMobil’s acquisition of BOPCO, in a deal estimated to be as much as USD6.6 bn, elevated its modest Permian exposure to a leading growth platform. Papua New Guinea and Mozambique are long-life developments and broaden the company’s options for medium-term LNG development.

In terms of exploration, Ellacott says  ExxonMobil is the standout performer notching up five discoveries in Guyana, holding over 2.5 bn barrels. The wider industry’s lack of appetite for conventional exploration leaves the door wide open for the majors to reload portfolios.

ExxonMobil, Total, Statoil and Eni acquired vast positions in under-explored basins during the downturn – much of it with low commitments, providing options for medium-term resource renewal.

DRO opportunities

Finally, the majors have all been active in accessing discovered resource opportunities (DRO). Oil companies bid to develop and produce existing, large oil or gas fields, negotiating terms with the host government. Total (Abu Dhabi, Iran), BP (Abu Dhabi, Azerbaijan), Chevron, ExxonMobil and Statoil (Azerbaijan) have all signed concessions in the last three years.

Wood Mackenzie research suggests returns from DROs awarded since 2014 are attractive, and in some cases better than can be achieved through mergers and acquisitions. This may indicate the industry downturn has shifted negotiating power towards the operator.

“We are witnessing the early stages of the industry preparing for the long haul – the challenges of the energy transition and the attendant risks of peak oil demand, disruption from renewables and electric vehicles, and perhaps sustained pressure on oil and gas prices,” Ellacott said.

Wood Mackenzie's Tom Ellacott discusses how oil majors have adapated to their new environment.
Wood Mackenzie’s Tom Ellacott discusses how oil majors have adapted to their new environment.

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