Wednesday, August 31, 2011

Has Peak Oil Come To The Non-Opec World? Maybe.

The world’s biggest oil companies put in a pretty pathetic performance in the second quarter of 2011. Not in terms of earnings — those were great, with Exxon posting $10.7 billion and Royal Dutch Shell doing $8 billion. Just what you’d expect with Brent crude at a lofty $120 a barrel.

Where the results were disappointing was in the barrels. Of the 16 big U.S. and European oil companies studied by Deutsche Bank analyst Paul Sankey, 14 of them saw their production of petroleum decline in the quarter. Collectively, the drop amounted to 12% of total liquids volumes, or 1.2 million bpd. Their average output for the quarter totalled, 14.67 million bpd. Even excluding the effect of Libya’s issues, the decline was 8%.

The situation didn’t get much better when Sankey looked at other big non-OPEC producers. Brazil’s supposed growth engine Petrobras was down a touch, as were Russia’s Lukoil and TNK-BP and China’s Sinopec. Rosneft (2.2 million bpd) and PetroChina (2.4 million bpd) did eke out gains of 2% and 4%.

Overall, the producers of 31 million bpd (out of a worldwide total of roughly 86 million bpd) saw their output fall 4%. No wonder Sankey titled his report “The Death of Non-OPEC.”

OPEC volumes, by contrast, were up 2% in the quarter, figures Sankey.

So what’s going on? Is Peak Oil here, at least in the non-OPEC part of the world? Maybe so. “In identifying mega-themes, we have argued that the shift from the 20th to 21st century represents the end of the oil age and the beginning of the global electricity age,” writes Sankey. “The concentration of remaining (abundant) oil reserves into OPEC hands derives an obvious corollary: the end of growth from non-OPEC supply.”

The supermajors are finding it harder and harder to pry away the remaining megaprojects from state-run oil companies. Of the biggest OPEC members like Saudi Arabia, Iran, Venezuela and Iraq, only the latter is eager to bring in the majors to help develop reserves.

Add in the fact that natural decline rates on big fields average 5% a year, and it will become ever harder for Big Oil to stay big. Christophe de Margerie, the pragmatic chief executive of French giant Total, believes that global peak oil will hit within five years (see my story on Total: “High Friends In Low Places”).

The bigs are finding some growth from newly developed natural gas resources. Indeed, when you factor in gas production, Exxon’s total volumes were up 10% in the second quarter — thanks to the ramp up of its megaproject in Qatar (See my cover story: “ExxonMobil — Green Company Of The Year”). But gas sells for barely a third of oil on an energy equivalent basis.

There were some outliers. BP had the biggest plunge, down 10% or 250,000 bpd due to the effect of selling off assets in the wake of the oil spill. Spain’s Repsol was down 15%, with Hess Corp. off 10%.

What about the impact of liquids produced from unconventional resources like the Eagle Ford shale and the Bakken formation? Though that’s been a big growth trigger for smaller independent explorers, writes Sankey, “their growth is far less meaningful at the margin.”

So what will it mean for the oil market when only OPEC can meet oil demand, especially considering that China and India’s oil needs are ramping from such a tiny per capita base? “It seems very clear that higher and highly volatile oil prices will be a necessary fact of future oil markets,” writes Sankey.

What’s an investor to do? Buy oil companies of course, especially those that show any likelihood of boosting oil output. The only big one likely to do that this year, Occidental Petroleum, trades at 10 times expected 2011 earnings. Sankey also rates Canadian Natural Resources a buy, expecting eventual growth from its oil sands operations.

Another idea (mine, not Sankey’s) — buy the bigger independents like Anadarko Petroleum, Apache Corp., EOG Resources, which have real growth potential and will likely become meals for the growth-starved majors in the years ahead.

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