Major oil companies seem to be divided between their desire to keep their shareholders happy by passing on to them improved dividends and the growing capital spending that eats into their profits.
If such trends continue, they will simply consolidate the grip of the national oil companies controlled by governments in producing countries with typical geostrategic potential implications for the industry.
The weak profit performance of most of the oil majors reflects to a large extent the rising cost to pump out oil and gas. Available figures show that the three major oil companies — ExxonMobil, Chevron and Royal Dutch Shell — have a combined capital spending of half a trillion dollars over the past five years looking for oil and gas, but with very little positive results to show in comparison.
Part of the problem is that oil and gas reserves are getting harder and difficult to find, especially the major ones known in the industry circles as “elephant fields.”
Because state-owned companies control almost 80 percent of the world reserves, that pushed companies to look into tough and remote areas in Asia, Africa and deep water. This happened when a Western consortium was operating in the Caspian Sea and saw its spending growing from the originally planned $10 billion to $40 billion.
The problem is not only in underdeveloped places like the Caspian Sea, but even in Australia the price tag of the big Gorgon gas project shot up by 45 percent to $54 billion though the project expected to tap on a 40 trillion gas reserves and utilize its production for a ready market in Japan, China and South Korea.
The reputable company Ernst & Young had released figures showing how production costs have been rising faster than revenues. It said that in 2008 global oil and gas companies averaged $64.91 per barrel of oil equivalent in revenues, with production costs of $15.29 per barrel.
Four years later and in 2012, revenues stood at $64.94, but production costs jumped to $18.88 per barrel.
With such rising production costs, the shareholders find themselves at the end of the queue to receive a return on their investments, which puts managements under huge pressure. After all those listed companies are required to announce quarterly results, which in itself is a pressuring tool that weakens the trend for a long-term planning and investment.
With new and big oil and gas discoveries getting harder and costlier, the emphasis focuses on fossil energy producing countries with their huge reserves mainly in the Middle East and Venezuela, that is back again to OPEC, which continues to play the role of the residual supplier of the market needs as it continue to have excess production capacity based on its reserves.
OPEC is quite clear about its role and after it gave up its endeavor to influence oil prices its main focus remains its market share. However, with the growing world demand for oil and gas, OPEC will be called on to deliver or open up its huge reserves to foreign investments.
But OPEC countries can make better use of the cards in their hands and overcome capital, technology and skilled labor to overcome obstacles to tap on their reserves.
Besides, they are more suited to handle these issues given the fact that they are not under pressure to announce quarterly positive results to please shareholders or not to freeze huge investments simply to keep excess production capacity functioning.
However, though OPEC is no longer using production tool to influence the price of the barrel, yet that factor continues to be in the heart of any serious discussion about ensuring supplies and eventually establish market stability.
After all, producing countries need to have a price that can generate enough income to help them meet their governments’ needs as well as have additional funds for investment in the industry. And that is why $80 a barrel was seen as a reasonable price that helps also in the goal of rationalizing consumption.
Previous experiences have shown that less investments create future supply crisis, but investments need at the same time some guarantees that they will find a market. And that is where some sort of a deal or an understanding needs to be developed between producers, consumers and companies for the sake of market stability that benefits all players.