Posted on 08/29/2014 1:58:24 PM PDT by ckilmer
Over 100 of the world's largest energy companies are running out of cash. Photo of Keystone pipeline in Nebraska by Shannon Ramos. Creative Commons licensed.
Some of the summer's biggest news stories took place in the bombed schools of Gaza, the abandoned hospitals of the Democratic Republic of Congo, the wheat fields of eastern Ukraine and the bloody mountains of northern Iraq.
But one of the most important made virtually no headlines at all, and seemed to only appear on the website of the U.S. Energy Information Administration.
Last July the government agency, which has collected mundane statistics on energy matters for decades, quietly revealed that 127 of the world's largest oil and gas companies are running out of cash.
They are now spending more than they are earning. Profits have lagged as expenditures have risen. Overburdened by debt, these firms are selling assets.
The math is simple. The 127 firms generated $568 billion in cash from their operations during 2013-2014 while their expenses totalled $677 billion. To cover the difference of $110 billion, the energy giants increased their debt load or sold off assets.
Given that the gap between earned cash and spending stood at a modest $10 billion in 2010, that's a significant change for the industry as well as the global economy it fuels.
Mining messy bitumen
The Energy Information Administration doesn't explain why the world's major hydrocarbon producers are now spending more and making less. But an August report by Carbon Tracker, a non-profit financial think-tank, provides some possible answers.
Most companies are now investing in high-cost and high-risk projects to mine difficult hydrocarbons such as bitumen or shale oil, according to Carbon Tracker. Hydraulic fracturing, the land equivalent of ocean bottom trawling, adds to the cost of oil, too.
It's not only the firms deploing fracking that are racking up high debt loads. Chinese state-owned corporations, for example, plopped down $30 billion to develop junk crude in the oilsands over the last decade.
But with a few exceptions, none of the investments are making a good dollar return due to the difficult and costly nature of mining messy bitumen as well as problematic quality of the reserves, combined with huge cost overruns.
By Carbon Tracker's calculation, bitumen remains the world's most expensive hydrocarbon. The extraction of this fuel signals that business as usual is over, and mining of extreme hydrocarbons comes with extreme financial and political risks.
Cheap and easy days are over
The Chinese aren't the only ones facing diminishing returns from high-cost projects in the oilsands.
Most of the world's oil and gas firms are now pursuing extreme hydrocarbons because the cheap and easy stuff is gone. The high-carbon remainders include shale oil, oilsands, ultra deepwater oil and Arctic petroleum. (Industry now wants to frack the Northwest Territories, too.)
But given that oil demand in places like Europe, the United States and Japan is flattening or declining, many analysts don't think that high-carbon, high-risk projects (which all need a $75 to $95 market price for oil to break even) make much economic sense in a carbon-constrained world.
"Our analysis demonstrates that a blind pursuit of reserve replacement at all costs or a focus on high expenditure regardless of returns could go against improving shareholder returns," recently warned Carbon Tracker.
The capital costs for liquefied natural gas (LNG) terminals supplied by heavily fracked coal or shale fields is also rising. Highly complex LNG projects in Norway, Australia and Papua New Guinea have all experienced major cost overruns.
Goldman Sachs now reckons more than half of the oil companies listed on the stock market -- are spending five times more than what they did in 2000 chasing extreme hydrocarbons. As a consequence they need an oil price of $120 a barrel to remain cash neutral in the future.
Spending more cash to get less energy has major implications for the global economy, a creature of oil. Whenever nations spend lots on oil, they record crazy exponential growth, like China. And whenever nations spend less on petroleum, like Europe and the U.S., there is stagnation.
Oil's slavish hold
To explain oil's slavish hold on the global economy, the Russian physicists Victor Gorshkov and Anastassia M. Makarieva employ a useful metaphor.
Imagine a town of 100 people. Ten own the air, the oil of the modern economy, and they force everyone else to pay to breathe. The other 90 work hard and give the air owners about 10 per cent of their production.
Whenever the price of air goes up quickly (and the cost of extracting oil has increased substantially in the last decade -- about 12 per cent a year), then economic growth slows to a crawl. The air owners have killed the growth potential of the workers.
Sooner or later the owners of the air realize they have to lower the price. "As the air price goes down, the workers feel better.... This, in short, is the scenario of the global economic crisis, how it starts and how it develops," explains Gorshkov and Makarieva. "Curiously, none of the economic analysts relate the world crisis to the abnormally high oil prices that preceded it."
But diminished returns from extreme hydrocarbons will do more than slow down productivity and increase price volatility. They will impose lasting and material adjustments on all of us.
In addition to seeing fewer vehicles on the road (a startling U.S. reality already), we shall also see lower wages (except in the hydrocarbon industry), rising food prices, rising personal debt loads, increased demands on governments increasingly short of revenue, explosive inequalities in wealth and rising political conflict.
Our new narrative
We shall also see more of what the U.S. Energy Information Administration dutifully recorded: soaring debt loads to support massive energy sprawl. That means industry will spend more good money chasing poor quality resources. They will inefficiently mine and frack ever larger land bases at higher environmental costs for lower energy returns.
Combined with its twin brother, climate change, this is the great energy narrative that will shape our destiny in the years to come.
Marion King Hubbert, a Shell geologist, predicted this development decades ago and presented the cultural conundrum clearly: "During the last two centuries we have known nothing but an exponential growth culture, a culture so dependent upon the continuance of exponential growth for its stability that is incapable of reckoning with problems of non-growth."
But why would such a radical development be news in the dog days of summer?
The biggest mistake the West has made in at least the last 20 years is allowing China to become an economic power.
For this analysis, EIA considered 42 U.S. and international oil and gas companies that have reported data on upstream expenditures since 2000. The companies range in size of production and include publicly traded as well as state-owned enterprises, including large producers such as ExxonMobil and Petrobras, and smaller ones such as Encana Corporation and Talisman Energy. The 42 companies made up approximately 39% of non-OPEC production in 2013, and had a combined market capitalization of more than $2.4 trillion.
Generally rising oil prices from 2000 through 2011 contributed to large increases in the companies’ cash flow from operations (Figure 2) and provided the funds needed to increase upstream expenditures. As crude oil prices increased, projects that had been uneconomic became feasible. Companies significantly expanded operations related to tight oil production in the United States and oil sands production in Canada. With many companies expanding oil and gas production activities at the same time, costs for equipment and personnel also increased, further pushing up expenditures. Costs for raw materials increased as most commodities experienced a general price rise from 2002 through 2008, although commodity prices have come down since 2012. After the 2008-09 economic downturn, property acquisition expenditures slowed first, as spending shifted to exploration, development, and production.
Although oil prices remained relatively flat in 2012 and 2013, rising costs contributed to a decline in cash flow from operations. Nonetheless, cash spent on investing activities, which tends to lag changes in cash flow, increased slightly in 2013 as companies increased debt to maintain investment, taking advantage of interest rates that have been low since 2009. Companies have increased debt every year since 2006, with long-term debt increasing 9% and 11% in 2012 and 2013, respectively.
Your perspective would be valuable here.
compare this story with thackney’s post about US midsize companies in the fracking boom—which if prices remain above +-$90@ barrel will go cashflow positive next year.
http://www.freerepublic.com/focus/f-news/3198117/posts
If they do go cash flow positive—it wouldn’t be unreasonable to think that a lot of the super major oil companies will try hard to buy into the US oil boom by buying midsize US oil companies.
My vote of course would be that US oil companies stay out of foreign hands and especially foreign state controlled company hands. If anything I’d rather the US midsized oil companies got too big fast for the super majors to gobble up.
It has been a rising issue for a while.
Several major production projects have been shelved due to rising cost.
While you have to spend money to make money, there is always a limit.
We’ve had a few articles on it before.
Big Oil Spending More, Getting Less in Production
http://www.freerepublic.com/focus/news/3160662/posts
5/27/2014
Why is it entirely a bad thing for well over a billion people to begin to climb out of absolute poverty?
What do you think we should, or could, have done to keep China from becoming richer?
NOT enough information in the article IMO. WHY are the costs going up? Is it the costs of leases? Is it the costs of Production? What are the costs that are going up? Are they government foisted costs? It’s unclear why.
I understand the profits being down, Worldwide slowdown in oil consumption due recession, but what is/are the basis for the rising costs?
A major problem with this analysis is that companies are expensing, rather than capitalizing E&P activity.
Upstream oil and gas spending continues to favor exploration and development activity
............
Makes sense since most of the drilling going on in the world right now is happening in the USA where all the land has already been acquired and mostly permitted. All they’re doing is trying to get their arms around what they have—which keeps getting revised upward as know how and technology improve.
Most of this work on land is being done by US midsized companies.
It looks like the biggest debt problem world wide is happening to the big state owned oil companies.
And those new gas folks weren’t satisfied with their Democrat-tied move against U.S. coal. They’re bragging about cheating the Canadians, too. That will come back to bite ‘em. Canada will be a real net energy exporter for the foreseeable future, oil sands and conventional, and has the attentions of the bigger investors. Some constituents have also been running interference for the Russian threats against Canada—very stupid and traitorous policy.
That wasn’t a mistake, it was done intentionally by government and corporate traitors.
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