Crude price slump demands a rethink of oil companies’ business models

“Economists set themselves too easy, too useless a task, if they can only tell us that, when the storm is long past, the ocean is flat again,” the late, great British economist John Maynard Keynes observed. The same is true for oil company strategists. Business models launched during a buoyant market have now to navigate a potentially long period of low oil prices.

Five company models developed over the past decade appear particularly in need of streamlining.

First are the buccaneers, the small oil companies who sailed into uncharted waters and picked up exploration acreage everywhere from Namibia and Tanzania to Greenland and North Korea. Some were spectacularly successful, such as Kosmos which made Ghana’s first big oil find in 2007, and followed up with a large gas discovery off Mauritania this April. But others drilled strings of dry wells in remote frontiers or could not raise the capital or expertise to develop the fields they found.

Many of these companies will sink without a trace or become prey for larger competitors. Some may be sold at reasonable prices, and a few will merge or grow themselves into survivors who can benefit in the next upward price cycle.

Second are the sharks of shale. Companies such as Continental, Chesapeake and EOG Resources snapped up new resources created by the hydraulic fracturing revolution in the United States. But like sharks, they have to continue moving to keep breathing – and with drilling in a slump, some are in trouble.

The shale industry is the victim of its own success, having first crashed US gas prices, and now global oil prices. Last week, Samson Resources filed to wipe out more than US$3.25 billion of debt, the largest shale bankruptcy to date. Lenders’ patience is likely to dry up, as companies’ hedges against low oil prices expire and their creditworthiness is reassessed. But by improving technology, reducing costs and focusing on the best shales, the stronger shale producers should survive.

Third are the supertankers, the supermajor oil companies such as Total and ExxonMobil. They are not in danger of foundering, but they have struggled in recent years with swelling costs and stagnant production.

The supermajors’ financial strength should serve them well. Their downstream assets in refining and marketing performed poorly by comparison with oil and gas production when prices were high, but have proved to be a valuable hedge now that prices have plunged.

Like Shell, which for once has moved aggressively to snap up the smaller UK rival BG Group, the supermajors may find some attractive assets for sale. But they have to cut costs and shed the excess ballast acquired during the easy years.

Fourth are the flagships, the internationalised national oil companies. Some, like Brazil’s Petrobras, brought their expertise to the international scene. Others – such as China National Petroleum Corporation, Sinopec and India’s Oil and Natural Gas Corporation – took on the role of “securing” hydrocarbons for their fast-growing domestic markets, amid widespread fears of decline in global oil production.

Over-ambition, though, has mired Petrobras in debt, corruption and a leviathan investment programme. And the Chinese, South Korean and Indian oil companies are thinking again about some of their more expensive and questionable purchases.

Fifth are the merchants, the trading companies who realised profits from their speed in scenting opportunities, not just in oil and gas but also in metals, agriculture and any other commodity. But some, like Glencore with its acquisition of the miner Xstrata, have burdened themselves with too much debt and too many physical assets.

Even the best captain and navigator will struggle with a vessel that is not seaworthy. Some oil company models need running repairs, others a thorough rebuild. The survivors of this storm will be ready to benefit from the next upturn, which, though inevitable, may be distant.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.

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