Financial Times: Replacing replacement: Posted 23 December 2005
Published: December 22 2005 02:00
This time around, however, the logic is less compelling. There are some special
situations: it makes little sense, for example, for Norway's Statoil and Norsk
Hydro to continue bidding against each other. Likewise, nil-premium mergers
between other regional majors and smaller independents would aid diversification
and cut costs. Bigger oil companies, however, have to be fed. If replacing 1m
bpd of production was hard enough, try 3m or more, especially when the best
resources are off-limits. Consolidation also does not really address the main
problem. The majors' traditional strengths - technology, capital and know-how -
are on offer from a larger range of competitors. Banks and oil services
companies do not ask for reserves in return. Two decades of cost-cutting have
left the majors with little slack - hence Royal Dutch Shell's recruitment drive
for engineers, launched earlier this year.
The question hanging over the traditional majors in this new world is: what do
they still do better than anyone else? Market access, developing fuels and
refining offer medium-term answers for some. But they all imply the same thing:
lower returns than the current generation of oil executives and shareholders
have been used to. In that environment, marketing a company as a stable yield
stock with some alternative fuels up its sleeve makes sense. Shrinking the
business to protect returns should also not necessarily be seen as capitulation.
This means that focusing on replacement and production growth measures makes
less sense. Regulators can help to ease this transition. The Securities and
Exchange Commission's current system of booking proven reserves is a relic of
the 1970s. A more realistic assessment of oil companies' available resources is
needed - by including, for example, oil sands and uncontracted gas reserves. At
this pivotal time, that, at least, would help investors move beyond
preconceptions.
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