The "Big Five" U.S. producers -- ExxonMobil Corp., Royal Dutch Shell, BP plc, Chevron Corp. and ConocoPhillips -- together last year spent 56% of their mighty cash flow on share repurchases and dividends, but the next 20 "second tier" U.S.-based independents were quicker on their feet, outperforming the majors in exploration and development, according to a study by the Baker Institute for Public Policy.
The institute, part of Houston-based Rice University, reported that the cash flow for the five international oil companies (IOC) has increased fourfold since the 1990s, but most of the money has been directed toward stock buybacks and dividends instead of exploration and development. Meanwhile, the tier of U.S. producers increased their exploration and development spending to the extent that the spending of the 20 now matches that of the five.
"The handwriting is on the wall," said co-author Amy Myers Jaffee. "The oil majors are not replacing reserves. It's as if they are slowly liquidating their long-term asset base. They may see a declining rate of production over time and eventually that is bad news for both their shareholders and consumers."
The analysis was based on the institute's research on investment expenditures by the IOCs, the next 20 largest U.S.-based independents and national oil companies (NOC). Data were obtained from Securities and Exchange Commission filings since 1995, and in the case of NOCs, from news reports and other public data.
Exploration spending by the five IOCs has been flat or lower since the Organization of Petroleum Exporting Countries (OPEC) began to constrain market supply in 1998, the authors noted. Given the uptick in costs of material, personnel and equipment such as drilling rigs, the five largest IOCs have cut spending levels in real terms over the past 10 years, the report found.
However, this trend may be easing: exploration spending by the Big Five rose by 50% between 2005 and 2006. Production-wise, the Big Five's output declined to 9.45 million boe/d in 2005 from 10.25 million boe/d in 1996. In 2006, the IOCs' output reached 9.7 million boe/d. However, the next 20 largest independents reported that production rose to 2.13 million boe/d in 2006, up from 1.55 million boe/d in 1996.
The next 20 largest publicly traded U.S. producers have not followed the majors' lead, said the authors. Since 1998 they have steadily increased exploration spending, and their spending now equals that of the five largest IOCs.
"This differing pattern comes despite the fact that the five largest IOCs have access to operating cash flow that is three times the size of the next 20 largely traded American oil firms. This trend indicates that these 20 next-largest publicly traded American firms will control an increasing portion of non-OPEC oil production in the coming years."
NOCs represent the top 10 oil reserve holders internationally. By comparison, ExxonMobil, BP, Chevron and Shell are ranked 14th, 17th, 19th and 25th, respectively. The IOCs still rank among the largest oil and gas producers worldwide, and these Western-based majors also have achieved a dramatically higher return on capital than NOCs of similar size.
"The five big IOCs are still an important force in the market," Jaffee noted. "Their production represents over 20% of non-OPEC production. But investors are placing a higher premium for the stock shares of emerging national oil companies, despite the measurable edge the majors have in terms of operational efficiency. Clearly, they are betting on who will own the oil in the future." She said an announcement earlier this month that Brazil's state oil company had an 8 billion bbl discovery "is a case in point."
Oil production of the five largest oil companies has declined since the mid-1990s. By contrast, for the next 20 U.S. independent oil firms, their oil production has risen since 1996, from 1.55 million b/d in 1996 to about 2.13 million b/d in 2005 and 2006.
Since 1994, the nine NOCs that actively participate in international exploration invested more than $66 billion abroad in upstream activities. Chinese firms alone announced foreign projects worth $9 billion in 2006, most of which was in the form of access to oilfields in Russia, Nigeria and Kazakhstan -- comparable to the total amount spent by the Big Five on exploration that year but still small compared to the $59.4 billion they spent on exploration and development combined, said the report.
"Wall Street investors increasingly recognize these new exploration investment trends and the value of shares of NOCs have risen at a much faster rate than those of the largest IOCs," the authors noted. "Parallel restraints on exploration spending by the Big Five and major OPEC producers could lead to less competitive global oil markets in the next decade."
The "wave of consolidations in the 1990s of the largest publicly traded oil firms has not led to related success in completion of large, complex oil projects and reduction in costs for those projects," said the report. "Several of the world's largest oil companies merged in 1998, arguing for the need to cut costs, enhance efficiency and grow capital strength to tackle the massive spending requirements for multi-billion dollar mega-projects in places like Russia, Venezuela and Saudi Arabia.
"However, spending patterns of these companies since the mergers failed to show any appreciable increase in exploration spending from the previous levels of their pre-merger entities. One explanation for this trend is that companies may now be constrained by significant political changes in major oil producing countries such as Russia and Venezuela."
Given the "superior record of the next 20-largest publicly traded American oil firms for reserve replacement and exploration activity, there appears to be a level of consolidation that suggests that firms can become too large to effectively exploit the kinds of reserves currently available for private capital."
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