[R-G] Oil Groups Face Capital Stagnation in Spite of Price Rises

[Macdonald Stainsby]

Yoshie Furuhashi wrote:

> That popular impression, however, is deeply misleading. While company
> profits have indeed risen to record highs as the price of oil has
> soared, their profitability as measured by return on capital employed
> has stagnated.

This is a direct result of two things: The collapse of the value of the 
$US and the lack of new, easy/free energy discoveries and the peaking of 
oil; that leads to the twin problems of higher operating costs based on 
the lack of access to cheap, easy to access crude and that lack makes 
for the construction of new technologies and materials (steel, labour, 
energy inputs for production) much more expensive. Tar sands used to be 
break even at les than $40 a barrel, now estimates are over $70. This is 
clearly not because of environmental regulations-- these are being 
negotiated downwards from Utah to Alberta to Africa. The costs are 
associated with everything from food prices to construction going up, 
making production not only more difficult but much more expensive.

> The IHS Herold/Harrison Lovegrove study of oil and gas companies'
> upstream businesses found their average return on capital last year
> was just 1 percentage point higher than in 2004, even though the
> average price of oil during the year was $30 a barrel higher.
> 
> With the price of oil already almost $40 a barrel off its peak over
> the summer, and quite possibly headed lower, the profitability of the
> industry could signal trouble ahead.

This is somewhat illusory, in terms of whether or not the lack of 
profitability will lead to a death of energy resources itself. This or 
that corporation may not be able to find it feasible to continue 
exploration, but it is impossible for the heavy, expensive and ecocidal 
projects such as the tar sands to become uneconomic to the point of 
disappearing. Simply put, tar sands are so vastly integrated into global 
supplies that if the price dropped to the point that such oil was 
uneconomic then all of that production would come off the grid only long 
enough for the shortening of supply to drive the price almost 
instantaneously back up. For the first time in history, we have such a 
tight market globally that the temporary disruption of even less than a 
million barrels a day has an incredible impact on the price. 
Destructive, dirty and expensive oil is simply too integrated into the 
world system for this to ever occur.

*snip*
while this next paragraph is roughly true, the following one is more 
indicative:

> Capacity shortages in the supply chain, in everything from drilling
> rigs to steel pipes to skilled staff, have sent costs rising in line
> with revenues.
> 
> Services companies, which work for the oil producers, have typically
> done much better out of the boom in the industry.
> 
> Since the start of 2004 shares in ExxonMobil, the world's biggest
> quoted energy company, have risen by 89 per cent. Shares in
> Schlumberger, the biggest quoted oil services group, are up 231 per
> cent. The other big winners from rising commodity prices have been the
> governments of resource-rich countries.

Those who are "downstream" in the industry, i.e., the refiners-- are the 
ones who have the most to gain and the least to lose from this process. 
And among those is Sunoco, formerly the owner of Suncor, who now supply 
them with tar sands mock crude and who also fund the Pew Foundation and 
their satellite "groups" such as the Canadian Boreal Initiative. Using 
their money to set up front groups who blunt opposition is now the order 
of the day, and their profits are massive and not in the same flux as 
their suppliers, who are a lot more vulnerable on the market.

> Governments from Algeria to the UK have been tightening the terms on
> which they deal with oil companies, through tax increases, contract
> renegotiations, and in the most extreme cases forced transfers of
> assets.

Ultimately, without any other intervention, nationalization will start 
to be a wave globally soon as a way out of the market constraints, at 
least for the producers at the deposits and reserves themselves. This 
will do nothing to undo the worst damages yet to come as a result of 
industrialization on the grandest scale yet, and as such would only be 
the most temporary advance-- unlike the results of nationalization of 
high industry in almost all other cases. Human and planetary health is 
simply too vastly disturbed to make it a realistic "alternative" to only 
nationalize these plants.

*snip*

> Even after giving the service companies and the governments their
> bigger slice, oil company profits have still been rising to record
> levels. Their return on capital has been limited however, by the
> massive investment programmes these companies have been undertaking.
> Exxon will spend $25bn this year.

This trend is impossible to overturn, as capital costs cannot come down 
in either terms of geology or market principles and values.

> David Thomas of Citigroup points out that much of the spending oil
> companies have been making has been on projects that are not yet in
> production.

The tar sands are nowhere near full production in Aberta; just the 
already approved and in construction mines (not counting the 70% of the 
tar sands deposits that are "In Situ" or SagD produced)are producing oer 
1.3 million barrels a day and yet they will (without any other projects 
being brought in) get to over 3 million in less than a decade. These 
construction plans already have capital outlays that total just under 
$200 BILLION, and that number is before any mock oil is synthesized from 
the earth.

> "These companies have been playing catch-up after the oil price
> collapse at the end of the 1990s. Low oil prices caused many of them
> to cut their capital spending, and now they are realising that to
> maintain production, they need to spend more. So a higher proportion
> of their capital is now non-productive."

Again, as the places let to explore are either geologically nightmarish 
(Deep ocean floors) or "politically unstable" (i.e., Africa), this trend 
will only grow more each year, especially since few countries have yet 
switched over to accepting Euros instead of dollars for their oil, and 
the US economic structures show no signs of an FDR-like resurgence after 
the continuation of this collapse.

> As the price of oil falls, some of the pressures that have squeezed
> profits on the way up will ease. New drilling rigs are coming into
> service, new engineers are being trained.

And again, this is not a trend we see in dropping oil prices, but the 
settling of the price back into where it is primarily geology and market 
share that deals the dollar per barrel value. The price is still well 
over a $100 a barrel, and yet we are so far gone into these 
irreconcilable price hikes that we refer to this as a major drop!

*snip*

> "I can see aggressive spending on organic growth, and organic spending
> on acquisitions."

This is an obvious point: When oil reserves are not acquirable through 
exploration, then buying out smaller players to grow overall company 
reserves (the "grow or die" phenomenon) becomes the other strategy 
available. So, we will likely see the super giants getting ever bigger 
and a new wave of nationalizations and state interventions taking place 
as this lack of expandability continues to crunch in on the global 
market. Imperial//Exxon and Shell will expand and buy out others, Russia 
and maybe even Angola will start to take state control (or at least 
direction) of oil producers as this trend intensifies.

> The highest returns in the world for oil and gas companies are to be
> found in the Asia Pacific region, Russia and the Caspian, and Africa
> and the Middle East, according to the IHS Herold/Harrison Lovegrove
> study. The lowest are in Canada, which includes the oil sands and the
> US.

*snip*