Despite $100 oil, cost control takes center stage in energy industry

03/04/2014 3:57 PM

03/04/2014 3:58 PM

With crude oil over $100 a barrel and natural gas well above its low point, making money wouldn’t seem to be a problem for energy companies these days.

And yet Irving-based Exxon Mobil said last week that it will trim its capital spending by $5.5 billion, or about 12 percent, in 2014 and maintain that level for years. On Tuesday, the British oil giant BP announced a reorganization of its U.S. operations and said it represented a shift toward “more efficient cost management.”

Then, addressing the IHS CERAWeek energy conference in Houston, the CEO of the French oil company Total S.A. said only one thing needs to be discussed.

“Cost control, even cost-cutting,” is what’s needed, Christophe de Margerie said.

What lies behind those comments is a surprising fact: The oil and gas industry really hasn’t generated strong returns on the hundreds of billions of dollars it has spent in recent years to develop increasingly expensive reserves. According to IHS, the industry had an annual return on invested capital of 10 to 15 percent from 2009 to 2012, the lowest since the period between 1980 and 1998.

That falls well short of returns from 2000 to 2008, according to IHS, and reflects the huge investments made in shale fields and huge offshore and natural gas projects in the past few years.

“There was a moment in time to grab very large pieces of what looked like very good stuff,” said Maynard Holt, head of exploration and production investment banking at Houston-based Tudor, Pickering, Holt & Co. “2013 was a year to reassess,” he said, and “now there’s tremendous pressure to recapitalize.”

That includes not just reducing acquisitions and watching pennies on capital projects but also reorganizing those acquisitions more efficiently or selling assets added during the binge.

“Companies are having to show they’re offering a return. Majors and large independents are divesting, slowing down projects,” said Poppy Allonby, managing director for BlackRock Investment Management in the United Kingdom.

Holt said companies are working to use the assets they acquired more effectively, pointing to Exxon’s 2010 acquisition of Fort Worth-based XTO Energy as an example.

While some observers have concluded that Exxon overpaid when it spent $41 billion for XTO just as natural gas prices were tanking, Holt disagrees, saying that XTO’s expertise in shale development and operations is proving valuable.

“XTO is showing up in Exxon projects. It’s expanding inside of Exxon,” he said.

Chevron CEO John Watson told CERAWeek attendees Tuesday that while the price of crude oil has about tripled in the past decade, the industry’s costs for finding and developing new fields have doubled. That cuts into results that the spending boom has been able to deliver, he and others say.

“What we are doing today is too expensive,” in the sense that high costs frustrate the industry’s ability to meet the world’s growing demand for energy, de Margerie said.

“If we don’t invest, there will be a shortage of oil,” he said, and even higher prices.

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