Trends in Upstream Oil and Gas 31 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
This is a rather broad topic and I'll choose to structure it along several issues of choice: trends in offshore, main development focus of oil companies, ownership trends.

Generally, offshore oil was estimated to account for about 1/3 of the world's reserves at the start of the new millenium; this ratio would likely have grown significantly in recent years with the discovery of major offshore reserves in countries like China and Brazil. Offshore exploration/production is naturally much more expensive in terms of equipment and logistics compared to onshore, but offers much more potential reward; as oil prices kept rising it became increasingly viable.

The continuing rise in oil prices also suggests a possible lengthening of the exploration cycle. It was noted in 2007 that we were probably in the middle part of the global oil exploration cycle, which meant that the emphasis would start shifting from drilling towards development of the oilfields. This would shift demand toward FPSOs (floating production storage offloading) vessels and pipelaying vessels that facilitate logistical transfer of the oil/gas from offshore to onshore, and indeed we see quite a number of FPSO and pipelaying contracts for companies like Keppel and Swiber in 2008. However, the continued strength of oil given apparent long-term Asia-Pacific demand growth and tight supply might mean a second wind in the exploration boom --- hence more demand for rigs, where the tightness persists.

The tightness is especially strong in deepwater exploration, which many believe to be the strongest growth segment in offshore exploration. This is due to the confluence of several factors: (1) high oil prices justifying economic viability; (2) technological maturity allowing ever deeper drilling depths; (3) successes in deepwater in recent years encouraging further exploration. It is worth watching one success story to appreciate the potential reward of deepwater:
















The figure is self-explanatory. Brazil, under Petrobras, is now one of the world's top deepwater sites. It's worth noting that the above figure was before they made a huge offshore deepwater discovery late last year that could potentially make them among the top three oil producers in the world.

Deepwater is one of the key expansion areas of the oil majors. See, for example, how Shell envisages its production mix to evolve over the next decade:















Key deepwater drilling areas are in Western Africa, off southern Brazil, the Gulf of Mexico, and Southeast Asia. The opportunities in Southeast Asia, particularly, are shown below:















What this suggests is that there will be strong sustainable demand for early movers and dominant service providers in the deepwater segment. This includes manufacturers of deepwater-capable rigs (ie. semi-submersibles) and drillships, and owners of deepwater-capable offshore vessels. Utilisation of these equipment are near 100% and rates are high and growing.

Expanding their gas portfolio is another major thrust of the big oil companies. Looking back at the Shell pie-chart above, we see planned expansions in LNG (Liquefied Natural Gas) and Tight gas sands, as well as a new segment GTL (Gas-to-Liquid). All three are natural gas-related. LNG is natural gas that has been cooled to a liquid form to facilitate transportation. When delivered to the consuming market it is returned to a gaseous state and injected into the standard natural gas pipeline system. GTL uses natural gas as a raw material to produce liquid petroleum products (implicitly it competes with LNG for natural gas as raw material). Key geographical areas are Qatar and Australia's Northwest Shelf. Natural gas from tight sands is conventional natural gas extracted from unconventional reservoirs. The key exploration area is Canada. (Indeed, I would buy C$ for long-term investment if I were a forex trader).

Natural gas remains the most viable substitute for crude oil in in most applications except transportation, and it usually is found together with crude oil. The above plans therefore should not be surprising. It also suggests opportunities for service providers in this area, such as manufacturers of gas compression equipment like Cooper Cameron. Indeed, there is apparently a supply shortage of gas compression equipment.

Ranked on the basis of oil and gas reserve holdings, 14 of the top 20 upstream oil and gas companies in the world are national oil companies. State monopolies represent the top 10 reserve holders internationally. In terms of world oil production, however, only six of the top firms are national oil companies, while ExxonMobil, Royal Dutch Shell, BP and ChevronTexaco represent among the largest oil and gas producers worldwide, reflecting the general superiority of the Western oil majors in operational efficiency and technological ability. The upstream O&G industry has become increasingly politicised in recent years, as supply grows tighter; examples are countries like Russia, Venezuela, Iran and Indonesia looking for ways to nationalise oil assets, renege out of existing deals or use oil as a political weapon. China is looking to tie up energy deals with key suppliers like Australia and Western Africa. In such a "scramble" (a scenario envisaged by Shell over the next 20 years), the operating environment might look increasingly difficult for private oil companies, and small oil companies with little clout might not be as good investments as surging oil prices suggest, especially if they are operating in less developed countries with unstable flip-flopping governments.

References:
(1) A Guide to Oil Reserves and Resources
(2) World Oil Magazine Outlook 2008 Oil industry spending plans grow 9%
(3) How Much Oil From Deepwater: The Brazilian Experience
(4) Shell presentation Mar 2008: Building New Heartlands
(5) Innovation Norway presentation Apr 2007: Deepwater Oil and Gas Malaysia
(6) Exxon Mobil presentation Sep 2007
(7) Chevron presentation Mar 2008: Upstream and Gas
(8) CRS report for Congress Nov 2004: The Gas-to-Liquids industry and Natural Gas Markets
(9) Centre for Energy website
(10) Baker Institute: The Role of National Oil Companies in International Energy Markets