High prices at the pump are finally giving oil companies the incentive to make long — and expensive — bets to find new supplies. No one is going deeper than ChevronTexaco.
The bad news for oil consumers is that global demand has been growing at 1.5 percent a year over the past five years, while production capacity has been inching ahead at 0.2 percent. That squeeze all but wiped out the industry's spare capacity and caused a spike in prices. The good news is that the zooming prices have gotten the attention of oil producers.
Outside the Middle East, West Africa and parts of Russia, most of the easily accessible reservoirs have been sucked nearly dry. Extraction and development costs in North America have rocketed to $11 per barrel from $5 in 1999, and in Europe to $18 per barrel from $11 over the same period. New reserves are much tougher to find and must be pried loose from wily dictators or from deposits deep under the ocean bed or in sandpits — and that costs big bucks. “The prospects are few and far between,” says Louis Gagliardi, an oil analyst with John S. Herold Inc. in Norwalk, Conn. “Oil companies have to run hard and run fast just to stay in place.”
At $20 a barrel, anyway. The prospects for long bets look a whole lot better at $34, which is where the five-year-out futures contracts are settling. “There's plenty of oil, but the costs of developing major new reserves in hard-to-get-to places are 100 percent higher than a decade ago,” says analyst George Gaspar at Robert W. Baird. “High price is the incentive for these guys to step up to the plate.” At the right price, there is a lot of oil. The Department of Energy estimates the amount of fluid hydrocarbons remaining in the Earth's crust is the equivalent of 7.6 trillion barrels of oil. That figure includes natural gas and tar sands. It's enough oil and gas to last 170 years.
Until the spike in prices, the Big Five were spending $47 billion a year on exploration and production — and getting less and less per dollar spent. ExxonMobil, the colossus among titans, shells out $12 billion a year on E&P and hasn't been able to grow beyond 4.2 million barrels a day for five years. At the bottom of the heap, ChevronTexaco of San Ramon, Calif. will invest $6.4 billion this year, but will still suffer a 4 percent decline in production. “I do worry about supply,” says David O'Reilly, ChevronTexaco's chief executive. “I see upward pressure on demand in an economically developing world.” In China — at 6.3 million barrels a day now the second-largest consumer of oil on the planet after the U.S. — energy use will probably double by 2020, says O'Reilly. Worldwide energy demand, driven by the population growth and industrialization of the developing world, will expand by 40 percent in the next 20 years.
How to meet that demand? The industry will enjoy estimated net income of $137 billion this year, up from $46 billion five years ago, according to Herold. The producers can easily, even after distributing $80 billion in dividends and share buybacks, afford the anticipated capital spending of $180 billion in each of the next two years. Tectonic shifts are already under way in their portfolios as they move out of declining fields in North America and the North Sea and push deeper into new regions with new technologies.
No one is pushing harder than ChevronTexaco, which is under tremendous pressure to show results. While it earned $10.4 billion on $130 billion in revenue over the last 12 months, its return on capital employed averaged 13 percent over the last five years, compared with 17 percent for ExxonMobil, reports Simmons & Co. That weakness is reflected in ChevronTexaco shares, which recently traded at 10.3 times expected 2004 earnings, compared with ExxonMobil's 14.4 and BP's 13.6.
ChevronTexaco is also a runt in terms of reserves, with 12 billion barrels of oil equivalents. ExxonMobil has 22 billion; BP, 18 billion; and Royal Dutch/Shell, even after its embarrassing 20 percent haircut, 14 billion. Production, at an average 2.6 million BOE (barrels of oil or the natural gas equivalent) a day, is about where it was three years ago at ChevTex.
Still, over the last five years the company has been the most adventuresome — at least by number of exploratory wells drilled — of the Big Five. Eager for a payoff, ChevronTexaco Vice Chairman Peter Robertson vows that production will hit 2 million barrels a day by 2008. “If I don't do this,” he says, “I'm fired.”
Good luck, says Bear Stearns analyst Frederick Leuffer. That requires annual growth of 3.6 percent, while Leuffer predicts 2 percent to 3 percent. By contrast, he argues, ExxonMobil and Total will increase production 4 percent a year; BP, 7 percent.
Squeezed though it is, ChevronTexaco is investing what it can in higher-value ventures. Which is why it is in the process of selling off its interests in 1,100 of 1,500 producing oil and gas fields to raise a hoped-for $5 billion. And where is it putting its chips, an estimated $50 billion, over the next decade?
- Into deepwater drilling, from which 10 percent of the world's oil supply is expected to come by 2010;
- into the former Soviet Union, which has the greatest collection of liquid hydrocarbons outside the Middle East;
- into heavy oil in Venezuela and tar sands in Canada;
- and into natural gas and the ships to carry it.
ChevronTexaco drilled the deepest well ever last November, in the Gulf of Mexico's Alaminos Canyon area. It was the first well thrusting past more than 10,000 feet of water. After positioning the drill head at the seafloor, the Discoverer Deep Seas bored a hole another 4 miles down into the Earth at a cost of more than $50 million. The ship must stay perfectly still while drilling and does so using six thrusters with 15-foot-diameter propellers that can rotate 360 degrees. Linked to GPS devices and sonar positioning beacons on the seafloor, the thrusters can keep the ship in a steady position even in 95mph winds. To power the thrusters and drilling equipment, the ship generates 37 megawatts of power, enough for a city of 35,000. At that depth, a key piece of equipment is the blowout preventer, which weighs up to 300 tons and caps the well, holding back ultrapressurized (15,000 pounds per square inch) oil deep in the Earth.
The Toledo prospect, as it is known, was thought to hold as much as 200 million barrels of oil before it was drilled, and ChevronTexaco hoped to pair it with nearby discoveries by Shell and Unocal and build a shared production platform. But record-setting Toledo turned out to be a costly dry hole, illustrating the fact that even in these days of space-age 3-D seismic studies, wildcatting is still a risky business.