As oil becomes harder to find and produce, oil companies are increasingly dependent on riskier, more costly resources.
Latest Report: Reserves Replacement Ratio in a Marginal Oil World (Jan. 2011)
Private international oil companies have limited opportunities for growing their oil production. They have been forced to go to the extremes to pursue oil wherever they can get it.
Tar sands and ultra-deepwater are the present while the offshore Arctic and oil shale (kerogen) could be the future. But all of these resources are far more expensive, complicated and challenging than the oil these companies were bringing into production a decade ago.
The recession and subsequent oil price crash of late 2008 exposed the vulnerability of tar sands development to volatile oil prices. The Deepwater Horizon disaster in 2010 dramatically exposed the dangers of ultra-deepwater drilling. For BP’s shareholders the impact was unprecedented and remains far from resolved.
The oil industry continues to seek growth in oil production despite the increasing risks and challenges and despite the fact that if the world is to avoid catastrophic climate change we must reduce oil consumption dramatically within the present decade. If and when the world starts to take that threat seriously and embark on the necessary reductions in oil consumption – which seems all the more likely as a response to increasing oil prices – the most expensive to produce oil will be the first casualty. Oil majors appear increasingly vulnerable to demand destruction as a result of their increasing concentration in these marginal oil resources.
Since 2008, Oil Change International and its partners (Greenpeace UK and Platform) have been analyzing the implications of the oil major’s emerging dependence on riskier and costlier oil.
We started by looking at the UK’s major oil companies (BP and Shell) and their emerging dependence on Canadian tar sands resources.
Rising Risks in Tar Sands Investments (Sept. 2008) documents potential headwinds facing the tar sands industry including escalating costs, labor shortages, legal challenges, regulatory and reputational risks.
The report formed the basis for a number of seminars and events in London throughout 2008-09, attended by institutional investors in BP and Shell.
Shifting Sands (July 2009) discussed the impact of high oil prices on the long term viability of tar sands production and other costly forms of production.
High oil prices can destroy demand for oil through consumer response, by choking off economic growth and through triggering government action to encourage efficiency and diversification.
Companies that are increasingly dependent on high cost resources are more exposed to the price volatility that follows an oil price rally.
This report also includes a look at energy security claims around tar sands and an examination of the carbon intensity of Shell’s oil reserves.
Reserves Replacement Ratio in a Marginal Oil World (Jan. 2011) examines a key metric used by investors and analysts to value oil companies.
If oil is becoming costlier and riskier to produce, is replacing reserves something that should be viewed more critically when assessing company value? While RRR is just one of many metrics used by analysts, it is one that demands strong performance in something other than simple profit generation or return on investment. It demands the constant reacquisition of a fast disappearing commodity.
Our research found that at least four of the top six IOCs have significantly relied on tar sands reserves additions to support RRR rates in the past five years. As a percentage of total liquids additions, tar sands represents between 26% and 71% of reserves additions for these four companies (see table).
The report also exposed the opacity of company reporting on reserves when it comes to the different types of oil production.
We will be releasing more reports later in the year. We continue to seek to engage investors in a dialogue about the structural shifts facing the oil industry. We recognize that the oil industry generates significant profit for investors and that it is a challenge to find less damaging targets for the huge amounts of capital that these companies can soak up and deliver return on. However, in the long term, the risk profile of this industry is changing dramatically and we encourage investors to think about the implications of this and consider strategies to reduce their exposure to these risks.