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Supermajors have lost ground amid the rise of IOCs and NOCs

Genel boss Hayward tells delegates tyranny of scale may force IOCs to rethink strategy

The rise of national oil companies (NOCs) and independents over the past 10 years has dramatically changed the resource ownership map, reversing the balance between international oil companies (IOCs) and NOCs. But are the supermajors losing ground? “It’s a tyranny of scale that afflicts many other sectors,” Tony Hayward, chief executive of Anglo-Turkish independent explorer Genel Energy told WEC 2013.

Certainly, the financial markets are questioning if IOCs should be broken up in order to expand again, the former chief executive of UK supermajor BP added.

Still, the world needs them to develop the most challenging projects. Hayward believes only IOCs have the technical skills and financial muscle to develop the Arctic reserves – estimated to hold 30% of the world’s undiscovered gas reserves and 14% of undiscovered oil reserves – as well as complex capital-intensive liquefied natural gas projects.

Yet no major oil company has managed to boost its reserves between 2000 and 2010, rather they all posted declines, Dr Philippe Gerbert, managing director of Boston Consulting Group, told delegates. However, while he believes the majors will stabilise their share of reserves by 2015, Gerbert added they clearly will have lost ground.

As a result, IOCs have struggled to attract investment from capital markets, as they were slow to react to rising oil prices over 2005-2006. But over the last four to five years they have started to take on more exploration risk.    

IOCs also missed out on the unconventional boom in North America, which was pioneered by the independents. Between 2008 and 2011, the supermajors, as well as Anglo-Australian group BHP Billiton, battled to catch up. In that time they spent $95 billion buying up 15 million acres of unconventional shale-gas acreage in North America, according to Boston Consulting Group. They control 25% of the shale assets and cumulatively pump 1.2bn barrels of oil equivalent per day (boe/d). But IOCs have significantly higher break-even costs. The independents break even at $2-3 per million British thermal units (Btu), whereas the majors need at least $3-5/m Btu to turn a profit. As a result, almost all of them have recorded significant impairments, says Gerbert. “Not only did they overlook the sector in the beginning, but intrinsically they are competing differently”.

The independents’ run of success over the past decade has seen them unlock all the major new provinces. Not only did they open up shale-gas resources in North America, but also oil plays onshore, as well as gas plays offshore East Africa. They were responsible for tapping the deep-water sub-salt plays offshore Brazil, as well as off West Africa, and led the charge into Kurdistan.

Hayward attributes their success to four factors: high oil and gas prices freed up greater volumes of capital; technology was less about hardware, but more about knowing how to deploy it; a greater propensity to take risk, either on the technical or political frontiers; and lastly IOCs were slow to respond to rising prices as they were traditionally designed to tackle efficiencies in a low-price world.

But Hayward does not expect IOCs to give the independents a free run again. “Access will be much harder and certainly prices will not rise at the same pace witnessed over the last 10 years,” he said.

On the other hand, while there is a lot of talk about NOCs becoming international, very few have made it, bar Statoil, Hayward added.

They have become specialists in their own backyards, particularly in Brazil and the Middle East, the only exception being the Chinese NOCs, he added. Out of necessity and propelled by the state, the Chinese companies have been competing for resources in a thoughtful way, taking political risk rather than technical risk.

However, NOCs do compete with the IOCs. Apart from having plenty of capital, they have built strong alliances with oilfield service companies, says Gerbert. And the NOCs could compete with the supermajors in the frontier Arctic region, says Gary King, president of upstream player Tarka Resources.

There are also tremendous opportunities for the NOCs, with their relatively cheap access to capital, in the North American unconventional space, where trillion of dollars of investment is needed, he added. State-backed companies, particularly from Asia, are already part of the phenomenon.

King foresees the arrival of Middle Eastern NOCs too, as more joint ventures with independents, needing vast amounts of capital, will be formed. He sees more asset development tie-ups, not just in terms of financing, but also providing human capital, which is in short supply.

The financing problem is exacerbated because the private equity funds, which initially fuelled the unconventional revolution, are at the tail end of their investment cycle.

As they exit to return cash to shareholders, more strategic alliances will be born, which will be an exciting phase going forward, said King.

Ultimately, Hayward does not expect NOCs to compete with IOCs in the technical frontiers. More doors will also be left open for supermajors as the US independents increasing offload oversees investments to return home.

Still, NOCs control about 90% of the world’s oil reserves and 75% of production, as well as many of the major infrastructure systems. It’s a similar story for gas. On top of that, an estimated 60% of the world’s undiscovered reserves lie in countries where NOCs have privileged access.

But as Hayward points out NOCs will compete where the technical risk is lower, particularly onshore in the Middle East, Canada and East Africa. “They don’t believe they have the capacity to manage technically challenging projects,” he said.

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