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Beginning of the End? Oil Companies Cut Back on Spending | Our Finite World

Beginning of the End? Oil Companies Cut Back on Spending | Our Finite World.

Steve Kopits recently gave a presentation explaining our current predicament: the cost of oil extraction has been rising rapidly (10.9% per year) but oil prices have been flat. Major oil companies are finding their profits squeezed, and have recently announced plans to sell off part of their assets in order to have funds to pay their dividends. Such an approach is likely to lead to an eventual drop in oil production. I have talked about similar points previously (here and here), but Kopits adds some additional perspectives which he has given me permission to share with my readers. I encourage readers to watch the original hour-long presentation at Columbia University, if they have the time.

Controversy: Does Oil Extraction Depend on “Supply Growth” or “Demand Growth”?

The first section of the presentation is devoted the connection of GDP Growth to Oil Supply Growth vs Oil Demand Growth. I omit a considerable part of this discussion in this write-up.

Economists and oil companies, when making their projections, nearly always make their projections depend on “Demand Growth”–the amount people and businesses want. This demand growth is seen to be rising indefinitely in the future. It has nothing to do with affordability or with whether the potential consumers actually have jobs to purchase the oil products.

Kopits presents the following list of assumptions of demand constrained forecasting. (IOC’s are “Independent Oil Companies” like Shell and Exxon Mobil, as contrasted with government owned companies that are prevalent among oil exporters.)

Kopits 10 Assumptions of Demand Constrained ForecastingThus, it is the demand constrained view of forecasting that gives rise to the view that OPEC (Organization of Petroleum Exporting Nations) has enormous leverage. The assumption is made that OPEC can add or subtract as much supply as much as it chooses. Kopits provides evidence that in fact the Demand view is no longer applicable today, so this whole story is wrong.

One piece of evidence that the Demand Model is wrong is the fact that world crude oil (including lease condensate) production has been nearly flat since 2004, in a period when China and other growing Eastern economies have been trying to motorize. In comparison, there was a rise of 2.7% per year, when the West, with a similar population, was trying to motorize.

Kopits 20 Motorization and Oil in Historical Context

Kopits points out that China’s big source of oil supply has been US main street: China bids oil supply away from United States, to satisfy its needs. This is the way that markets have made oil available to China, when world supply is not rising much. It is part of the reason that oil prices have risen.

Another piece of evidence that the Demand Model is wrong relates to the assumption that social tastes have simply changed, leading to a drop in US oil consumption. Kopits shows the following chart, indicating that the major reason that young people don’t have cars is because they don’t have full-time jobs.

Kopits 35 Driving and Employment

Kopits makes a comparison of the role of oil in GDP growth to the role of water in plant growth in the desert. Without oil, there is less GDP growth, just as without water, a desert is starved for the element it needs for plant growth. Lack of oil can considered a binding constraint on GDP growth. (Labor availability might be a constraint, but it wouldn’t be a binding constraint, because there are plenty of unemployed people who might work if demand ramped up.) When more oil is available at a slightly lower price, it is quickly absorbed by markets.

“Supply Growth” is the limiting factor in recent years, because the amount of extraction is rising only slowly due to geological constraints and the number of users has risen to the point that there is a shortage.

Experience of Major Oil Producing Companies

Kopits presents data showing how badly the big, publicly traded oil companies are doing. He looks at two pieces of information:

  • “Capex” – “Capital expenditures” – How much companies are spending on things like exploration, drilling, and making of new offshore oil platforms
  • “Crude oil production” –

A person would normally expect that crude oil production would rise as Capex rises, but Kopits shows that in fact since 2006, Capex has continued to rise, but crude oil production has fallen.

Kopits 40 Oil majors capex and production

The above information is worldwide, not just for the US.  At some point a person might expect companies to start getting frustrated–they are spending more and more, but not getting very far in extracting oil.

Kopits then shows another version of Capex history plus a forecast. (This time the amounts are labeled “Upstream,” so the expenditures are clearly on the exploration and drilling side, rather than related to refineries or pipelines.)

Kopits 41 Upstream Spend continues Strong

The amounts this time are for the industry as a whole, including “NOCs” which are government owned (national) oil companies as well as IOCs (Independent Oil Companies), both large and small. Kopits remarks that the forecasts shown were made only six months ago. When talking about the above slide Koptis says,

People in the industry thought, “Capex has been going up and up. It will continue to do very well. We have been on this trajectory forever, and we are just going to get more and more money out of this.”

Now why is that? The reason is that in a Demand constrained model for those of you who took economics–price equals marginal cost. Right? So if my costs are going up, the price will also go up. Right? That is a Demand constrained model. So if it costs me more to get oil, it is no big deal, the market will recognize that at some point, in a Demand constrained model.

Not in a Supply constrained model! In a Supply constrained model, the price goes up to a price that is very similar to the monopoly price, after which you really can’t raise it, because that marginal consumer would rather do with less than pay more. They will not recognize [pay] your marginal cost. In that model, you get to a price, and after that price, there is significant resistance from the consumer to moving up off of that price. That is the “Supply Constrained Price.” If your costs continue to come up underneath you, the consumer won’t recognize it.

The rapidly growing Capex forecast is implicitly a Demand constrained forecast. It says, sure Capex can go up to a trillion dollars a year. We can spend a trillion dollars a year looking for oil and gas. The global economy will accept that.

I quote this because I am not sure I have explained the situation exactly that way. I perhaps have said that demand had to be connected to what consumers could afford. Wages don’t magically go up by themselves (even though economists think they can).

According to Koptis, the cost of oil extraction has in recent years been rising at 10.9% per year since 1999. (CAGR means “compound annual growth rate”).

Kopits 43 Costs are Rising Fast

Oil prices have been flat at the same time. On the above chart, “E&P Capex per barrel” is pretty much the same type of expenses as shown on the previous two charts. E&P means Exploration and Production.

Kopits explains that the industry needs prices of over $100 barrel.

Kopits 45 Industry needs oil prices over 100

The version of the chart I have up is too small to read the names of individual companies.  If you would like a chart with bigger names, you can download the original presentation.

Historically, oil companies have used a discounted cash flow approach to figure out whether over the long term, pricing for a particular field will be profitable. Unfortunately, this “standard” approach has not been working well recently. Expenses have been escalating too rapidly, and there have been too many new drilling sites producing below expectation. What Kopits shows on the above slide is the prices that companies need on different basis–a “cash flow” basis–so that each year companies have enough money to pay today’s capital expenditures, plus today’s expenses, plus today’sdividends.

The reason for using the cash flow approach is because companies have found themselves coming up short: they find that after they have paid capital expenditures and other expenditures such as taxes, they don’t have enough money left to pay dividends, unless they borrow money or sell off assets. Oil companies need to pay dividends because pension plans and other buyers of oil company stocks expect to receive regular dividends in payment for their equity investment. The dividends are important to pension plans.

In the last bullet point on the slide, Kopits is telling us that on this basis, most US oil companies need a price of $130 barrel or more. I noticed that Brazil’s Petrobas needs  a price of over $150 barrel. (OSX, Brazil’s number two oil company, recently went bankrupt.)

In the slide below, Kopits shows how Shell oil is responding to the poor cash flow situation of the major oil companies, based on recent announcements.

Kopits 46 The Majors Respond

Basically, Shell is cutting back. It no longer is going to tell investors how much it plans to produce in the future. Instead, it will focus on generating cash flow, at least partly by selling off existing programs.

In fact, Kopits reports that all of the major oil companies are reporting divestment programs. Does selling assets really solve the oil companies’ problems? What the oil companies would really like to do is raise their prices, but they can’t do that, because they don’t set prices, the market does–and the prices aren’t high enough. And the oil companies really can’t cut costs. So instead, they sell assets to pay dividends, or perhaps just to get out of the business. But is this sustainable?

Kopits 48 conventional oil production

The above slide shows that conventional oil production peaked in 2005. The top line is total conventional oil  production (calculated as world oil production, less natural gas liquids, and less US shale and other unconventional, and less Canadian oil sands). To get his estimate of “Crude Oil Normal Decline,” Kopits uses the mirror image of the rise in conventional oil production prior to 2005. He also shows a separate item for the rise in oil production from Iraq since 2005. The yellow portion called “crude production forward” is then the top line, less the other two items. It has taken $2.5 trillion to add this new yellow block. Now this strategy has run its course (based on the bad results companies are reporting from recent drilling), so what will oil companies do now?

Kopits 49 -Oil Majors Cut Capital Expenditures

Above, Kopits shows evidence that many companies in recent months have been cutting back budgets. These are big reductions–billions and billions of dollars.

Kopits 50 Majors Capex

On the above chart, Kopits tries to estimate the shape of the downslope in capital expenditures. This chart isn’t for all companies. It excludes the smaller companies, and it excludes the National oil companies, so it is about one-third of the market. The gray horizontal line at the top is the industry consensus back in October. The other lines represent more recent estimates of how Capex is declining. The steepest decline is the forecast based on Hess’s announcement. The next steepest (the dotted gray line) is the forecast based on Shell’s cutback.  The cutback for the part of the market not shown in the chart is likely to be different.

Oil and Economic Growth

Kopits offers his view of how much efficiency can be gained in a given year, in the slide below:

Koptis 54 Oil Efficiency and GDP GrowthIn his view, the maximum sustainable increase in efficiency is 2.5% in non-recessions, but a more normal increase is 1% per year. At current oil supply growth levels, OECD GDP growth is capped at 1% to 2%. The effect of constrained oil supply is reducing OECD GDP growth by 1% to 2%.

Conclusions

Kopits 59 ConclusionsWhile demand constrained models dominate thinking, in fact, a supply constrained model is more appropriate in recent years.

We seem to be short of oil. Whenever there is extra oil on the market, it is quickly soaked up. Oil prices have not collapsed. No one is nervous about a price collapse.

China recently has been putting little price pressure on the market–its demand is recently less high. Kopits thinks China will eventually return to the market, and put price pressure on oil prices. Thus, oil price pressures are likely to return at some point.

Gail’s Observations

An obvious point, which I thought I heard when I listened to the presentation the first time, but didn’t hear the second time is, “Who will buy all of these assets on the market, and at what price?” China would seem to be a likely buyer, if one is to be found. But when several companies want to sell assets at the same time, a person wonders what prices will be available.

The new strategy is, in effect, maintaining dividends by returning part of capital. It is clearly not a very sustainable strategy.

It will take a while for these cut-backs in Capex expenditures to find their way through to oil output, but it could very well start in a year or two. This is disturbing.

What we are seeing now is a cutback in what companies consider “economically extractable oil”–something that isn’t exactly reported by companies. I expect that what is being sold off is mostly not “proven reserves.”

In this talk, it looks like lack of sufficient investment is poised to bring the system down.  That is basically the expected limit under Limits to Growth.

In theory, if an expansion of China’s oil demand does bring oil prices up again, it could in theory encourage an increase in drilling activity. But it is doubtful that economies could withstand the high prices–they are already having problems at current price levels, considering the continued need for Quantitative Easing to keep interest rates low.

A recent news item was titled, G20 Finance Ministers Agree to Lift Global Growth Target. According to that article,

Mr Hockey said reaching the goal would require increasing investment but that it could create “tens of millions of new jobs”.

The cutback in investment by oil companies is working precisely in the wrong direction. If these cutbacks act to cut future oil extraction, it will bring down growth further.

Oil Train Derailments Reaching Crisis Point

Oil Train Derailments Reaching Crisis Point.

By Nick Cunningham | Tue, 18 February 2014 23:00 | 0

On February 13 a Norfolk Southern Railway train bound for New Jersey derailed in Vandergrift, Pennsylvania. About 3,500 to 4,500 gallons of crude oil spilled, although miraculously it somehow didn’t leak into nearby water supplies. The Federal Railroad Administration announced that it will investigate the crash. The episode is merely the latest in a series of derailments and will raise pressure on federal regulators to issue new safety rules.

It is hard to imagine the National Transportation Safety Board (NTSB) not taking action soon as the problem has become too common to ignore. Between 1975 and 2010 only 800,000 gallons of crude oil spilled from rail tankers. But in 2013 alone, over 1.15 million gallons of oil spilled. That is because shipping oil by rail has skyrocketed from fewer than 10,000 carloads in 2009 to more than 400,000 in 2013.

With hundred-car trains rolling out from the Bakken in every direction – west to Washington state and Los Angeles, south to Gulf Coast refiners, north to Canada, and east to refineries in New Jersey – towns and cities are calling for greater scrutiny, but are powerless to take matters into their own hands as rail safety is regulated at the federal level.

The NTSB and the Transportation Safety Board of Canada issued joint recommendations on January 23 that call for treating crude oil like other toxic materials. These came on the heels of fiery crash in North Dakota in late December 2013. The recommendations call on rail companies to use reinforced rail cars, enhanced safety procedures, and alternative routes that avoid populated cities and towns. But, the recommendations are not binding – and action on things like rail design safety would need to come from another agency, the Pipeline and Hazardous Materials Safety Administration (PHMSA). Regulators have said that they need more time to review rail designs and that they do not plan on publishing new rules within the next year. But, the issue isn’t going away. CSX, a major rail company, projects that oil shipped by rail will increase by 50% in 2014.

One of the major problems is that rail companies are using DOT-111 rail cars, which are older models used to carry agricultural products. These models have thinner walls that can puncture when they derail. This is particularly important because crude from the Bakken is more flammable than other types of oil. The Association of American Railroads issued new standards for manufacturers for cars built after 2011, which require thicker shells that are resistant to puncturing. But, the vast majority of railcars in use were constructed before this standard.

Related Article: Shell’s Asset Purge to Hit UK North Sea

The big question is whether or not PHMSA will require and accelerate the phase out of DOT-111 cars, making reinforced cars mandatory. Last summer, Senator Chuck Schumer (D-NY) wrote a letter to PHMSA, calling on them to do just that. PHMSA has thus far been unwilling to act, prompting North Dakota Governor Jack Dalrymple to press them for an interim standard until they come out with something more concrete in 2015. And Senators Ron Wyden and Jeff Merkley, both from Oregon, held ameeting with rail executives to push them on safety. Despite the pressure from a few lone politicians, the government has been slow to act and the rail industry has resisted any regulation, arguing it would cost more than $1 billion.

The House Transportation and Infrastructure Committee will hold a hearing on rail safety on February 26, an indication that after multiple train derailments and explosions, the issue is finally getting greater attention on Capitol Hill.

By Nicholas Cunningham of Oilprice.com

About the author

‘Big oil’ getting smaller as production keeps falling | | Platts

‘Big oil’ getting smaller as production keeps falling | | Platts.

February 14, 2014 – Richard Swann in London

* Top seven western majors all seeing liquids output fall
* Supermajors’ share of global market dropping every year
* BP reports fastest decline of 30% from 2009-13
* Production becoming more evenly split between oil and gas

The biggest western oil companies are continuing to see their oil output decline, despite record investment in recent years spurred by sustained crude prices in excess of $100/barrel, according to data released by the companies.

Furthermore, with total world oil output continuing to rise every year, the western majors are seeing their share of the global market fall even faster, with new volumes coming largely from their rivals in places like Russia and a host of smaller companies at the heart of the shale oil boom in the US.

Analysis continues below…


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Combined output of crude and other liquids by the seven biggest western majors — ExxonMobil, Shell, BP, Chevron, Total, ConocoPhillips and Eni — amounted to 9.517 million b/d last year, down 2.2% from 2012 and marking the fourth consecutive year of decline.

Liquids output from the same group has been falling every year of late, having been as high as 10.865 million b/d in 2009.

As a group, the seven have seen their combined liquids output fall by 1.348 million b/d, or 12.4% over the period from 2009 to 2013.

The most notable contribution to the overall decline comes from BP, whose production of oil and other liquids has fallen by more than 30% from 1.695 million b/d in 2009 to 1.176 million b/d in 2013.

These figures do not include production associated with BP’s current 19.75% stake in Russia’s Rosneft or its previous 50% stake in Russian oil producer TNK-BP.

This is a much sharper fall than other majors have experienced, and is evidence of the scale of the asset divestment program the company has been going through to cover its actual and potential liabilities in the wake of the disastrous Gulf of Mexico oil spill in 2010.

While its peers have not seen production fall by the same degree, they have nonetheless all experienced declining oil production since 2009.

Even ExxonMobil, the biggest of the group in terms of production and profitability, saw its oil output fall by 4.5% in 2011 and 5.5% in 2012, the two years with the highest average international oil prices of all time.

In 2013 ExxonMobil’s oil output rose by 0.8% to 2.202 million b/d, but it still remained more than 200,000 b/d below where it was in 2010.

Shell, Chevron, Total, ConocoPhillips and Eni also all saw their liquids production fall in 2013.

Total’s output declined by 15.5% between 2009-13, Eni’s by 17.3% and ConocoPhillips’ by 12.4%. Shell has seen the smallest fall of 2.5% over thesame period.

Dwindling share of global output

According to the International Energy Agency, total world oil supply has risen in recent years from 85.66 million b/d in 2009 to an average of 91.53 million b/d in 2013.

As a result, the seven leading western majors have seen their share of this total supply fall from 12.7% to 10.4% over the same period.

While this group is seeing its production fall, others have clearly been heading in the opposite direction.

The most obvious is Russia’s Rosneft, which has grown at breakneck pace in recent years on the back of a debt-funded acquisition spree, including the purchase of former rival TNK-BP.

Rosneft is now the world’s biggest publicly listed oil producer with total crude and liquids output of close to 4.2 million b/d.

In other words, Rosneft alone now produces almost as much oil as ExxonMobil, BP and ConocoPhillips combined.

The western majors are not short of either the expertise to produce more oil or the money to fund developments after 2013 marked the third consecutive year of Dated Brent prices above $108/barrel.

The recurring challenge for the western companies in recent years has been to find attractive investment opportunities, with several of the world’s leading oil reserves holders offering limited, or even no access to international operators.

“It’s an access question,” said an official from one of the western majors, who asked not be identified. “Who will let us in? They’ll only let us into the difficult bits like the deepwater projects, or tight gas, that kind of thing,” he said.

Gas growth

With their liquids output falling, the so-called “oil majors” are gradually becoming less oily and more reliant on gas production.

Oil accounted for more than 60% of ExxonMobil’s total hydrocarbons output in 2009, but by last year this figure had fallen to less than 53%.

It is a similar story for Total, where oil’s share of total production has fallen from 60.5% in 2009 to 50.8% in 2013.

Shell produced more gas than liquids last year, the third time in the last four years this has happened, and BP is not far away from a 50:50 split.

Of the seven majors who embody the image of “Big Oil” the only one bucking the trend towards greater gas exposure is Chevron, where oil continues to account for two thirds of all production — a full 10 percentage points more than any of the rest of the peer group.

Table: Production of oil and other liquids by leading western companies

Production of oil and other liquids by leading western companies

2013 2009 Change
ExxonMobil 2.202 2.387 -0.185 -7.8%
Chevron 1.731 1.846 -0.115 -6.2%
Shell 1.541 1.581 -0.040 -2.5%
BP 1.176 1.695 -0.519 -30.6%
Total 1.167 1.381 -0.214 -15.5%
ConocoPhillips 0.867 0.968 -0.101 -10.4%
Eni 0.833 1.007 -0.174 -17.3%
Total 9.517 10.865 -1.348 -12.4%

(all units in million b/d)

Source: company statements

Why turning a buck isn’t easy anymore for oil’s biggest players | Jeff Rubin

Why turning a buck isn’t easy anymore for oil’s biggest players | Jeff Rubin.

Posted by Jeff Rubin on January 27th, 2014

Judging by pump prices, Canadian drivers might think oil companies were rolling in profits that only move higher. Lately, though, the big boys in the global oil industry are finding that earning a buck isn’t as easy as it used to be.

Royal Dutch Shell, for instance, just announced that fourth quarter earnings would fall woefully short of expectations. The Anglo-Dutch energy giant warned its quarterly profits will be down 70 percent from a year earlier. Full year earnings, meanwhile, are expected to be a little more than half of what they were the previous year.

The news hasn’t been much cheerier for Shell’s fellow Big Oil stalwarts. Exxon, the world’s largest publicly traded oil company, saw profits fall by more than 50 percent in the second quarter to their lowest level in more than three years. Chevron and Total, likewise, are warning the market to expect lower earnings when fourth quarter results are released.

What makes such poor performance especially disconcerting to investors is that it’s taking place within the context of historically high oil prices. The price of Brent crude has been trading in the triple digit range for three years running, while WTI hasn’t been far off. But even with the aid of high oil prices, the supermajors haven’t offered investors any returns to write home about. Since 2009, the share prices of the world’s top five publicly traded oil and gas companies have posted less than a fifth of the gains of the Dow Jones Industrial Average.

The reason for such stagnant market performance comes down to the cost of both discovering new oil reserves and getting it out of the ground. According to the International Energy Agency’s 2013 World Energy Outlook, global exploration spending has increased by 180 percent since 2000, while global oil supplies have risen by only 14 percent. That’s a pretty low batting average.

Shell’s quest for new reserves has seen it pump billions into money-devouring plays such as its Athabasca Oil Sands Project in northern Alberta and the Kashagan oilfield, a deeply troubled project in Kazakhstan. It’s even tried deep water drilling in the high Arctic. That attempt ended when the stormy waters of the Chukchi Sea crippled its Kulluk drilling platform, forcing the company to pull up stakes.

Investors can’t simply count on ever rising oil prices to justify Shell’s lavish spending on quixotic drilling adventures around the world. Prices are no longer soaring ahead like they were prior to the last recession, when heady global economic growth was pushing energy prices to record highs.

Costs, however, are another matter. As exploration spending spirals higher, investors are seeing more reasons to lighten up on oil stocks. Wherever oil producers go in the world these days, they’re running into costs that are reaching all-time highs. Shell’s costs to find and develop oil fields, for instance, have tripled since 2003. What’s worse, when the company does notch a significant discovery, such as Kashagan, production seems to be delayed, whether due to the tricky nature of the geology, politics, or both.

Shell ramped up capital spending last year by 50 percent to a staggering $44 billion. Oil analysts are basically unanimous now in saying the company needs to rein in spending if it hopes to provide better returns to shareholders.

Big Oil is discovering that blindly chasing production growth through developing ever more costly reserves isn’t contributing to the bottom line. Maybe that’s a message Canada’s oil sands producers need to be listening to as well.

Shell Stops Alaska Program in Year of ‘Hard Choices’  |  Peak Oil News and Message Boards

Shell Stops Alaska Program in Year of ‘Hard Choices’  |  Peak Oil News and Message Boards.

Royal Dutch Shell revealed Thursday that 2014 will see the company stop its Alaska program and focus on achieving better capital efficiency by making ‘hard choices’ about new projects and reducing capital spending.

Announcing its results for 2013, Shell said that the landscape the company had expected has changed and it cited factors such as the worsening security situation in Nigeria and delays to non-operated projects in several countries. With North American natural gas prices remaining low, the company said it particularly plans to focus on restructuring and improving profitability in its North American upstream operations.

“Our ambitious growth drive in recent years has yielded a step change in Shell’s portfolio and options, with more growth to come, but at the same time we have lost some momentum in operational delivery, and we can sharpen up in a number of areas,” New Shell CEO Ben van Beurden said in a company statement.

“Our overall strategy remains robust, but 2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance.”

Meanwhile, Shell said the recent Ninth Circuit Court decision against the Department of the Interior “raises substantial obstacles to Shell’s plans for drilling in offshore Alaska”. As a result, Shell has decided to stop its exploration program for Alaska in 2014.

“This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014,” van Beurden said. “We will look to relevant agencies and the Court to resolve their open legal issues as quickly as possible.”

Shell’s capital spending in 2014 is targeted at around $37 billion, compared with the $46 million it spent in 2013. Meanwhile, the firm plans to increase the pace of its asset sales, which are expected to be $15 billion for 2014-2015 in both its upstream and downstream segments.

“We are making hard choices in our world-wide portfolio to improve Shell’s capital efficiency,” van Beurden added.

RIGZONE

Rising Costs Hit Balance Sheets of Major Oil Companies

Rising Costs Hit Balance Sheets of Major Oil Companies.

Quarterly earnings for Royal Dutch Shell have declined sharply due to large expenditures, delays, and lower than expected production. The oil-giant reported that it expects fourth quarter earnings from 2013 to come in 70% lower than the same quarter for the previous year. Fourth quarter earnings are expected to decline to $2.2 billion, down from $7.3 billion in 2012. The decline prompted Shell to issue a profit warning, its first in 10 years, hitting its stock price. The company expects to release a full-earnings report on January 30.

Shell’s capital spending surpassed $44 billion in 2013, a 50% jump over the prior year.  While investing in growth is necessary to turn a profit, many of Shell’s projects are floundering. After sinking over $5 billion in a multi-year effort to tap oil in the Arctic, Shell has nothing to show for it except for a series of mishaps and bad publicity. The company wants to return to the Arctic in 2014 after taking the year off last year to regroup, and submitted a scaled-back plan that they hoped would soothe the concerns of the Department of Interior. Yet with a January 22, 2014 decision from the Court of Appeals from the Ninth Circuit found that Interior violated the law when it sold offshore leases for exploration back in 2008. The ruling throws Shell’s plan into deep uncertainty, and is merely the latest blow to the company’s bungled Arctic campaign.

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Shell has also bet big on Kazakhstan, sinking over $30 billion in a project, again with little to show for it thus far. The project is 8 years overdue.

Related article: UAE to Invest $1.2bn in Kurdish Oil

The latest news may be indicative of a new phase for major international oil companies. Shell is not alone in investing huge sums to develop complex oil fields in far flung places around the globe. As easy-to-get oil declines, Shell and other oil companies are forced to search for oil in places that present geological and engineering difficulties –and thus present significantly higher costs. According to Reuters, the rising cost of oil projects around the world is a major topic of discussion at the World Economic Forum in Davos.

Another example is Chevron’s Gorgon LNG project, which is expected to come in at $54 billion, or $20 billion more than originally expected. Italian oil company ENI expects to blow around $50 billion on the Kashagan oil field in Kazakhstan, five times what it expected.

Ben van Beurden, Shell’s new CEO, hopes to take a more conservative approach, paring back large investments in “elephant projects,” according to the Wall Street Journal.Other major oil companies are also promising their shareholders they will cut back on expenditures. Reducing costs may be a good strategy in the short-term, but the profitability of major oil companies depends on their ability to replace reserves and produce oil, not just now, but 10-20 years from now. If these companies decide not to invest in new oil fields, they will not have additional capacity coming online in the years ahead.

But it is telling that Shell and others do not find it wise to invest in new oil projects. If that is indeed the case, then the world could be looking at much more expensive oil in the not-so-distant future as existing fields naturally decline and supply tightens.

By. Nick Cunningham

Davos: peeling back the veneer

Davos: peeling back the veneer.

(c) World Economic ForumScrolling through the website of the World Economic Forum – convening this week in Davos, Switzerland – one might confuse the premier platform for global capital with a savvy and hip think tank, or perhaps a philanthropic aid and development charity. The content is carefully curated to sedate and comfort. The right buzzwords are there: “impact investing”, “embracing democracy”, “our oceans”, and “sustainability.” In the Issues section, one finds Environmental Sustainability, Health for All, and Social Development. An article by Nobel laureate economist Joseph Stiglitz (a critic of globalization) is featured front and center, as if to proclaim, ‘challenging the stodgy status quo through edgy, unorthodox economic thinking – that’s what we do here.’

There’s nothing to indicate that this is, in fact, a platform for multinational corporations, among them human rights abusers, political racketeers, property thieves and international environmental criminals. But then, that wouldn’t exactly make for a very inviting homepage.

Here, for example, is the WEF mission statement:

The World Economic Forum encourages businesses, governments and civil society to commit together to improving the state of the world. Our Strategic and Industry Partners are instrumental in helping stakeholders meet key challenges such as building sustained economic growth, mitigating global risks, promoting health for all, improving social welfare and fostering environmental sustainability.

Rather than getting bogged down in a detailed evaluation of WEF’s high-minded claims and eco-populist rhetoric, it may be more efficient to consider the behavior of those corporations and banks that comprise the Forum’s list of Industry Partners – described as “select Member companies of the World Economic Forum that are actively involved in the Forum’s mission.”

Among them are Shell, Nike, Syngenta, Nestlé, and SNC Lavalin – companies you’ll also find on Global Exchange’s list of the Top 10 Corporate Criminals of 2013, based on offenses like unlivable working conditions, corporate seizures of indigenous lands, contaminating the environment, and similar transgressions. At least seven other companies “actively involved in the Forum’s mission” are recentalumni of the Corporate Criminal list.

Or consider Corporate Accountability International’s Corporate Hall of Shame, comprised of “corporations that corrupt the political process and abuse human rights, the environment and our public health.” Seven of the ten ­– Walmart, ExxonMobil, Bank of America, Coca-Cola, DuPont, Monsanto, and Nestlé (which has the dubious distinction of making both lists) are WEF Industry Partners.

How about climate change? This is now an issue that regularly features ominously in the WEF’s “Global Risks” annual report. Curious, then, that in addition to Shell and ExxonMobil, the Forum’s Industry Partners include most of the largest oil and gas companies in the world, from BP and Chevron to Gazprom and Saudi Aramco.“Carbon Majors” a peer-reviewed study in the scientific journal Climatic Change, lists the 90 entities most responsible for extracting the fossil fuels burned over the past 150 years. The top six are WEF Industry Partners.

Despite the carefully crafted words of concern for the poor and hungry, the WEF’s many food corporations – from Unilever and Pepsico to Cargill and General Mills – have actually parleyed the misery of the food crisis into further control over the food system, as well as spectacular profits. During the 2008 food crisis, the organization GRAIN released a report revealing that “nearly every corporate player in the global food chain is making a killing from the food crisis …. Such record profits … are a reflection of the extreme power that these middlemen have accrued through the globalisation of the food system. Intimately involved with the shaping of the trade rules that govern today’s food system and tightly in control of markets and the ever more complex financial systems through which global trade operates, these companies are in perfect position to turn food scarcity into immense profits.” (1)

Global banks also played a pivotal role in precipitating – and making a killing off – this food crisis. According to an investigative report by Frederick Kaufman, Goldman Sachs instigated a “global speculative frenzy” on food which “sparked riots in more than thirty countries and drove the number of the world’s “food insecure” to more than a billion …. The ranks of the hungry had increased by 250 million in a single year, the most abysmal increase in all of human history.” (2) Needless to say, scroll down to “G” in the Industry Partners list, and Goldman Sachs is there.

The fact is, digging into any of the crises we face will reveal the complicity of the very corporations that the World Economic Forum represents. A study conducted for the UN, for example, estimated the combined environmental externalities of the world’s 3,000 biggest companies to be $2.2 trillion in 2008, “a figure bigger than the national economies of all but seven countries in the world that year.” (3)

Impression of the World Economic ForumThese are just a few of innumerable possible examples. The corporations represented by the World Economic Forum are the agents principally responsible for destroying the planet, ravaging livelihoods, and literally starving people, all while aggrandizing unprecedented profits into the hands of an ever-tinier super elite. Seen in this light, all the burnished social and environmental concern-speak of the WEF is so much vacuous corporate swagger, the crudest sort of greenwash. Even though these companies actually spend huge amounts of capital and energy fighting environmental regulation and the citizen’s groups who are suffering their abuses, they simultaneously pursue a strategic embrace of environmental discourse and narratives; they accept the existence of the problems while promoting privatized, technocratic strategies for addressing them. These strategies pivot between those that assign responsibility for causing and fixing the problems to individual consumers, and those that position the corporations themselves as crucial players in the common cause of “improving”/”cleaning” the environment – the same one, incidentally, that they destroyed.

The absurdity of this schizophrenia reaches extreme limits: the WEF is solemnly concerned about global warming because – get ready for it – it represents one of the biggest threats ever to global trade and corporate capitalism! The primary perpetrator of global warming is now portraying itself as a victim. In WEF-land, global warming is like a mysterious, autonomous, alien force invading from afar, without cause or explanation. It “affects us all”, so we must all roll up our sleeves and unite – fossil fuel corporations included – in the battle against a common external foe.

There is, however, one part of the WEF’s mission that is being genuinely fulfilled: “building sustained economic growth”, code for increasing the power and wealth of its corporate partners. That this is the first of the “challenges” described in the WEF mission statement is no accident. Economic growth might seem an odd mismatch to the other issues, like social welfare and environmental sustainability, but the WEF has clearly embraced the notion that endless growth is not only compatible with environmental sustainability, it is actually necessary for it. That this myth has been thoroughly debunked seems to have conveniently escaped the WEF’s notice. (4)

This farce would be laughable but for the immense power and enormous control commanded by the corporations and banks the World Economic Forum represents. When the WEF promises to address agriculture, food security, environmental sustainability, and the like, we should be very worried for exactly those things. Peel away the eco-charity veneer and the WEF’s actual mission stands naked: advance the power, growth, and wealth of the corporate rulers of the world.

In no way should The World Economic Forum be allowed to insert itself as a legitimate voice on the resolution of the very issues that its agenda – the perpetual growth of its partners – precipitates. On the contrary, it should be fiercely resisted – precisely what the alternative World Social Forum, Occupy WEF, and other anti-globalization groups were created to do. (5)

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Alex Jensen is Project Coordinator at the International Society for Ecology and Culture (ISEC). Alex has worked in the US and India, where he coordinated ISEC’s Ladakh Project from 2004 to 2009. He has collaborated on the content of ISEC’s Roots of Change curriculum and the Economics of Happiness discussion guide. He holds an MA in Globalization and International Development from University of East Anglia. He has worked with cultural affirmation and agro-biodiversity projects in campesino communities in a number of countries and is active in environmental health/anti-toxics work.

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(1) GRAIN (2008) ‘Making a Killing from Hunger’, 28 April,http://www.grain.org/article/entries/178-making-a-killing-from-hunger, and

http://www.grain.org/article/entries/716-corporations-are-still-making-a-killing-from-hunger

(2) Kaufman, F. (2010) ‘The Food Bubble: How Wall Street Starved Millions and Got Away With It’, Harper’s Magazine, July,http://frederickkaufman.typepad.com/files/the-food-bubble-pdf.pdf

(3) Jowit, J. (2010) “World”s top firms cause $2.2tn of environmental damage, report estimates”, The Guardian, 18 February, 2010.

(4) see, e.g.: Jorgenson, A. and Clark, B. (2012) ‘Are the Economy and the Environment Decoupling?: A Comparative International Study, 1960–2005,’ American Journal of Sociology 118(1),1–44; Jorgenson, A. and Clark, B. (2011) ‘Societies Consuming Nature: A Panel Study of the Ecological Footprints of Nations, 1960-2003’, Social Science Research 40:226-244; Stern, D. (2004) ‘The Rise and Fall of the Environmental Kuznets Curve’, World Development, 32(8):1419–1439; Hornborg, A. (2003) ‘Cornucopia or Zero-Sum Game? The Epistemology of Sustainability’, Journal of World-Systems Research IX(2): 205-216.

(5) see http://www.fsm2013.org/en andhttp://www.reuters.com/article/2012/01/23/us-davos-idUSTRE80M13X20120123

The Takehome Lesson From Neil Young: Read the Jackpine Mine Decision For Yourself | DeSmog Canada

The Takehome Lesson From Neil Young: Read the Jackpine Mine Decision For Yourself | DeSmog Canada.

Neil Young Waging Heavy Peace Book Cover

This is a guest post by energy economist Andrew Leach.

Neil Young and the Honour the Treaties Tour is crossing the country in support of the Athabasca Chipewyan First Nation’s court challenge against Shell’s proposal to expand its mining operations north of Fort McMurray.

The biggest risk I see from this tour is not that Neil Young says things which are wrong (there have been a few), that he blames Prime Minister Harper for promoting an industry that has played an important role in the policies of pretty well every Prime Minister to precede him in the past four decades (that part was pretty clear), or, least of all, that he’s a famous musician who hasn’t spent his life working on energy policy.

The biggest risk I see is that all of the heat and light around the Neil Young tour will distract you from what you should do, which is to sit down, read the mine approval, and decide for yourself what you think.

joint review panel approved (PDF) the Jackpine Expansion in July 2013, and in December, the project received cabinet approval. The most important issue here, so far over-shadowed during Neil Young’s tour, is summarized in one line in the decision letter: “the matter of whether the significant adverse environmental effects (of the project) are justified in the circumstances.”

This decision is likely to be as important for the future of the oil sands in Canada and its so-called social license as the pipelines, rail accidents and greenhouse gas policies which have been covered to a much larger degree in the media. This is a decision where your government had spelled out clearly before it the environmental risks and uncertainties of an oil sands project, in all its gory detail, and decided it was worth it or, “justified in the circumstances.”

We’ve come a long way from the days when then-Premier Ed Stelmach declared environmental damage from the oil sands to be a myth.  Around that time, in its approval of the Kearl oil sands mine, for which Phase I started last year, a Joint Review Panel concluded that, “the project is not likely to result in significant adverse environmental effects.” But, the panel evaluating Kearl raised a flag, saying that, “with each additional oil sands project, the growing demands and the absence of sustainable long-term solutions weigh more heavily in the determination of the public interest.”

We’ve now reached the point—the panel evaluating the Jackpine Mine left no doubt—where significant environmental consequences will occur in order to not (and, I kid you not, these are the words used) sterilize bitumen. Reading the Report of the Joint Review Panel (warning, it’s a slog) will be eye opening. Let me give you a couple of excerpts, in case you can’t spare the time:

·      The Panel has concluded that the Project would provide significant economic benefits for the region, the province, and Canada

·      The Project will provide major and long-term economic opportunities to individuals in Alberta and throughout Canada, and will generate a large number of construction and operational jobs.

·      The Panel concludes that the Project would have significant adverse environmental project effects on wetlands, traditional plant potential areas, wetland-reliant species at risk, migratory birds that are wetland-reliant or species at risk, and biodiversity

·      The Panel understands that a large loss (over 10,000 hectares) of wetland would result from the Project, noting in particular that 85 per cent of those wetlands are peatlands that cannot be reclaimed.

·      The Panel finds that diversion of the Muskeg River is in the public interest, considering that approximately 23 to 65 million cubic metres of resource would be sterilized if the river is not diverted

·      The Panel recognizes that the relevant provincial agencies were not at the hearing to address questions about why the Project (which seeks to divert the Muskeg River: author’s addition) is not included in the Muskeg River Interim Management Framework for Water Quantity and Quality;

·      The Panel concludes that it could not rely on Shell’s assessment of the significance of project and cumulative effects on terrestrial resources;

·      The Panel notes that a substantial amount of habitat for migratory birds that are wetland or old-growth forest dependent will be lost entirely or lost for an extended period;

·      The Panel is concerned about the lack of mitigation measures proposed for loss of wildlife habitat…that have been shown to be effective.

Don’t stop reading before you get to the good parts:

·      Although the Panel has concluded that the Project is in the public interest, project and cumulative effects for key environmental parameters and socioeconomic impacts in the region have weighed heavily in the Panel’s assessment;

·      All of the Aboriginal groups that participated in the hearing raised concerns about the adequacy of consultation by Canada and Alberta, particularly with respect to the management of cumulative effects in the oil sands region and the impact of these effects on their Aboriginal and treaty rights.

It’s these last two that have got us to where we are today—to a First Nation challenging the government in court for a decision that it made which valued bitumen over the environment and their traditional territory and for not fulfilling its constitutional duty to consult on that decision.

The decision on this project will, in all likelihood, go all the way to the top court in the land. The decision which really matters, however, will be the one you take: is it justified, in your mind, given the circumstances?

This article originally appeared on Maclean’s. Republished here with permission. Read Leach’s Neil Young Fact Check, also on Maclean’s, here.

Image Credit: Waging Heavy Peace book cover

‘Watch what we do, not what we say’: Shell cancels U.S. gas-to-liquids plant

‘Watch what we do, not what we say’: Shell cancels U.S. gas-to-liquids plant.

When civil rights advocates grew restless because of President Richard Nixon’s right-wing rhetoric on the issue of desegregation, then-Attorney General John Mitchell told them, ”Watch what we do, not what we say.”

Those following the hype over America’s supposed newfound abundance of oil and natural gas would do well to follow that advice when evaluating what oil and gas company executives and their surrogates say.

When Royal Dutch Shell pulled the plug on its U.S. gas-to-liquids project recently, the company offered the same explanation it used when it shut down its oil shale project earlier this year: Shell sees better opportunities elsewhere. This explanation–much like the I’m-resigning-to-spend-more-time-with-my-family explanation–tends to deflect questions about why things aren’t working out.

What’s not working out for Shell is a planned $20 billion plant in Louisiana designed to turn natural gas into diesel, jet fuel, lubricants and chemical feedstocks, products typically produced by oil refineries. The plug was pulled, however, while the project was still in the planning stage.

Shell did actually say a little more about why it is abandoning the project in this almost inscrutable piece of corporate prose:

 Despite the ample supplies of natural gas in the area, the company has taken the decision that GTL is not a viable option for Shell in North America, at this time, due to the likely development cost of such a project, uncertainties on long-term oil and gas prices and differentials, and Shell’s strict capital discipline.

Now, here’s the same paragraph translated into simple English:

 The plant is going to cost a lot more to build than we thought it would. Natural gas prices are going up and could easily make it uneconomical to produce diesel and jet fuel from natural gas when compared to making them from oil. And, we don’t have unlimited funds to spend on everything we think of just to see if it works.

Shell CEO Peter Voser has voiced doubts about the so-called “shale revolution” in the United States (which refers to advances in drilling technology that have opened previously inaccessible shale deposits of natural gas and oil to exploitation). In fact, Shell took a $2.1 billion write-down on its shale assets in the United States. In lay terms, the company had to reduce the value of those assets on its balance sheet to reflect reality. The company also sold small tight oil fields related to shale deposits, fields that it no longer wishes to develop.

Voser said he still believes Shell’s remaining $24 billion investment in U.S. shale gas and tight oil will “be a success story for Shell.” Three-quarters of that investment is devoted to natural gas from shale. But, Voser added that the potential for natural gas and oil from shale elsewhere in the world has been “a little bit overhyped” citing concerns specifically about Europe.

Now, because this rhetoric is coming from an oil industry CEO, we can assume that he is walking the line between saying things which will get him removed from the invitation lists of his fellow oil executives’ cocktail parties–things otherwise known as the awful truth–and misrepresenting the facts to shareholders, which would get him into trouble in other ways.

But abandoning the gas-to-liquids plant speaks much more loudly than Voser’s actual remarks. It means Voser expects that natural gas prices simply won’t stay low long enough to make such a huge investment pay off. And, that means that he doesn’t believe the hype about an ongoing glut of U.S. natural gas.

So, Voser directs Shell to abandon a gas-to-liquids plant, the profitability of which would be destroyed by high prices for the natural gas which the plant must purchase. At the same time, he has Shell retain most of its shale gas wells, a move which only makes sense if he expects U.S. natural gas prices to go higher. And, those prices will only go higher if there is increased demand or reduced supply, or a combination of both.

It’s not hard to figure out the meaning of what Peter Voser is doing. But it is understandably difficult to shut out the constant din of abundance stories sponsored by the industry and its well-financed public relations machine–that is, until you understand that it’s not what the industry says that’s important, but what it actually does.

 

Potentially damaging Jackpine oilsands mine expansion OK’d by Ottawa – Edmonton – CBC News

Potentially damaging Jackpine oilsands mine expansion OK’d by Ottawa – Edmonton – CBC News.

Shell Canada’s Jackpine oilsands mine expansion plan has received the go-ahead from Ottawa, despite the environment minister’s view that it’s “likely to cause significant adverse environmental effects.”

In a statement late Friday, environment Minister Leona Aglukkaq concluded that the effects from the 100,000-barrel-per-day expansion are “justified in the circumstances.”

The nearby Athabasca Chipewyan First Nation has said the project will violate several federal laws covering fisheries and species at risk, as well as treaty rights.

They said they had received so little information on how Shell plans to live up to conditions imposed on it by a federal-provincial panel that they asked Ottawa for a 90-day delay on the decision – originally expected Nov. 6 – to work some of those issues through.

They were granted a 35-day delay, but Friday’s decision didn’t even wait until that period was up.

Allan Adam, chief of the Athabasca Chipewyan First Nation, was outraged that the federal decision came as the government was still supposed to be in talks with the band about how the project’s effects were to be mitigated.

“They just kept us in the loop and strung us along and played games with us,” he said. “To them it’s all a game.”

Although all 88 conditions the review panel placed on the project are now legally binding, Adam said neither the government nor the company has explained how those conditions will be met.

Adam said the government’s move to go ahead despite the serious environmental consequences of the project leave the band little choice.

edm-allan-adamAllan Adam, chief of the Athabasca Chipewyan First Nation, says the government’s decision has left the band with few options. ((CBC))

“This government has to realize we’ll be holding them accountable,” he said. “We’ll be looking at legal action and we’ll pursue this through legal action.”

Greenpeace speaks out against expansion

Greenpeace Canada issued a statement accusing the Harper government of putting the short term interests of oil companies ahead of environmental protection and First Nations treaty rights.

“Canada would be much better off diversifying its economy, investing inrenewables, green jobs and projects that get us out of this madness not deeper into it,” the statement said.

“How many more extreme weather events will it take till our Prime Minister realizes this is one problem he can’t mine his way out of?”

The Jackpine expansion would allow Shell to increase its bitumen output by 50 per cent to 300,000 barrels a day.

“We’re reviewing the recommendations and proposed conditions attached to the approval,” said Shell spokesman David  Williams.

Williams added Shell must consult with the minority partners in  the project – Chevron and Marathon – before making a formal decision to proceed.

Review panel suggests compensation for ‘irreversible damage’

A review panel concluded last July that the project was in the public interest but warned that it would result in severe  and irreversible damage so great that new protected areas should be created to compensate.

The review concluded that the project would mean the permanent loss of thousands of hectares of wetlands, which  could harm migratory birds, caribou and other wildlife and wipe out traditional plants used for generations.

It also said Shell’s plans for mitigation are unproven and warned that some impacts would probably approach levels that the  environment couldn’t support.

Shell has said Alberta’s new management plan for the oilsands area will provide more concrete data to assess and mitigate environmental impacts.

The company has purchased about 730 hectares of former cattle pasture in northwestern Alberta to help compensate for the 8,500 hectares of wetland that would be forever lost.

 

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