Saturday, May 12, 2012

Firm: Big 3 oil producers not always in control

Bob Tzacz

Alaska’s three oil giants are often seen as masters of the energy universe, not only controlling their own fates but also sometimes bending governments to their wills. ExxonMobil, ConocoPhillips and BP are among the mightiest business entities that ever crossed a trading floor, but a legislative review of their global portfolios showed that they also struggle with market evolution and the results of their own decisions.

BP, for example, is “a company that is fighting (production) decline” and all three are “in the throes of pretty fundamental change,” according to Tony Reinsch, a senior director for PFC Energy, the legislature’s consultant on oil and gas issues. The company provided technical expertise for this year’s regular and special session’s and continues under a $250,000 contract extension approved during last month’s term.

Reinsch provided a capital allocation and global portfolio review for each company at an April 24 hearing of the House Resources Committee.

With production of 4.5 million barrel of oil equivalence (mboe) per day, 24.9 billion (mmboe) in reserves and an April 2012 market capitalization of $402 billion, ExxonMobil is larger than the other two combined.

BP’s market capitalization was $133 billion, with 2010 production of 3.4 mboe and 17.3 mmboe in reserves. ConocoPhillips is a distant third at 1.6 mboe, 8.3 mmboe and $3.3 billion market capitalization.


Despite ExxonMobil’s size, Reinsch said, it was “in a bit of a box” in 2009 after Qatar imposed a moratorium on new development of its gas resources.

“People find it difficult to imagine a company like this could ever be in trouble, be conflicted or in a position where it was unable to move forward, but that was the situation they were in 12 to 18 months ago,” he said.

The moratorium was ordered because the sheikdom was “struggling” to make use of its massive revenues, Reinsch noted, but Qatar accounted for more than 20 percent of ExxonMobil’s 2010 production; and while production from existing wells continues, a major growth engine had been shifted to neutral.

ExxonMobil also missed the opportunity to develop a new field off the coast of Brazil when the country’s national oil company, PetroBras, was awarded the project. In response the company made two big moves

One, which Reinsch said was “absolutely unique” in its history, was the decision to buy XTO Energy, a specialist in production of unconventional oil and gas, and then to allow the company to operate, in effect, as an independent subsidiary. The $41 billion purchase in 2009 and other properties made the United States the leader among the 41 countries where ExxonMobil has production or upstream operations.

Reinsch said that ExxonMobil has provided little guidance on its plans for XTO and the market is waiting to see if it will be able to retain its position as the most profitable energy producer after repositioning in unconventional resource production. He also noted that ExxonMobil has the ability to hold off of gas project development in North America because of current low prices.

ExxonMobil’s second “big move” was the commencement, in 2011, of a partnership with the Russian company Rosneft to gain access to Arctic resources.

“If you’re looking for where Alaska fits with ExxonMobil it would be this,” Reinsch said.


After the April 2010 Deepwater Horizon well blowout in the Gulf of Mexico, BP faced a financial calamity that less than a half a dozen corporations in the world could have survived, but appears to be emerging from the episode as stronger company, according to Reinsch.

The Macondo well explosion was followed other costly problems including the fatal refinery fire in Texas in 2005 and the 2006 North Slope spill.

“I think there have been enough, or a series of incidents, one after the other that have raised red flags to which BP is now responding,” Reinsch said.

BP sold $30 billion in assets but acquired another $28 billion as it “rationalized” its portfolio.

“From being outside,” the company’s boardroom, Reinsch would have expected BP’s Alaskan properties to be on the auction block, but he said he had no indication that divestiture of assets here was ever considered.

“While the company did not plan on the depth of portfolio rationalization undertaken to date, this is a rare opportunity to high-grade assets holdings with the blessing of shareholders and analysts alike,” Reinsch said.

He noted that the structure of the joint operating agreement among the three North Slope majors, “would be a blocking factor to divestiture,” for any of them.

Of the 26 countries where it has operations or investments, BP’s largest producer is Russia. It accounted for roughly 29 percent of BP’s 2011 output, up from 26 percent a year earlier, and a significant portion of its headaches.

In 2003, BP entered TNK-BP, an apparently exclusive joint venture with a group of Russian billionaires. The oligarchs threatened to sue when BP attempted to partner with Rosneft on the deal that ExxonMobil eventually got.

In April, Reinsch said the episode would likely restrict BP’s Arctic ambitions, but earlier this month, a report in British newspaper The Telegraph said Rosneft has invited TNK-BP to participate in its Arctic projects.


While its fortunes are more closely tied to Alaska, ConocoPhillips is also a company in “substantive transition,” according to Reinsch.

ConocoPhillips began a “shrinking to grow” strategy in 2010 with a target of $15 billion in divestitures. To date it has sold about $7 billion, including what had been a 20 percent equity interest in Lukoil. The shift reduced its Russian production from 21 percent of world output in 2009 to three percent in 2011.

ConocoPhillips also restructured with the creation of Phillips 66, a downstream, or refining entity, leaving it with a “pure play” exploration and development focus. Despite the reorganization ConocoPhillips has not yet emerged from its identify crisis, according to Reinsch.

The company may be too large to compete with smaller and more nimble wildcatters but too large to enjoy the same global efficiencies of other majors.

A ConocoPhillips trademark is its reliance on Organization for Economic Co-operation and Development for its production, about 72 percent in 2010. The OECD includes the 34 most industrialized countries in the world. They offer political stability but are also maturing, high-cost basins.

While it replaces its Russian assets, ConocoPhillips’ world production is expected to decline through 2015. North America is the company’s largest producer with Texas shale gas and Canadian tar sands leading the way.

“Alaska is an area that is, right now, core and material to the company and expected to be so in the future,” Reinsch said.

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