With war fears still dominating the headlines in the Middle East and the US Federal Reserve slow to end easing, now would seem like a good time to own an oil field coming on line. Global oil prices remain over $100 a barrel with plenty of geopolitical risk around to keep them there at least for now. But as companies continue to crack the puzzle for producing increasing amounts of tight oil from source rock, first here in the United States and Canada and then down the road, in any number of places such as Argentina, Russia, China, and Mexico, oil price risk may have to be factored back into investment decision analysis. Is this arguing against tying up large amounts of capital in long range mega-projects with twenty year horizons.
While it is too early to say definitely where oil prices will be in ten or twenty years, US Energy Information Administration and National Petroleum Council high demand case projections of over $225 a barrel seem increasingly misplaced. So it seems some US CEOs are thinking twice about the wisdom of favoring large geopolitically risky reserves that will take years to develop over low risk, short term paybacks in shale. The number of US companies shedding overseas assets to repatriate capital back to the United States to increase drilling activities in the here and now continues to grow. This week Marathon Oil sold its share in an Angolan field back to Sonangol and picked up more acreage in the Eagleford shale. The move follows Apache Corp. which just dumped part of its Egyptian holdings on Sinopec to reduce debt and maintain its position as an important North America shale player. Devon Energy has also announced plans to divest from Africa to “reallocate” resources to North America. At first glance such moves may seem 100% geopolitical risk driven, but could it also be that stock market investors are secretly saying to weigh NPV analysis to think about what a certain $100 immediate cash flow barrel right now means for today’s returns compared to a future $30 or $50 barrel in a pension for retirement in twenty years? With the world in such disarray, living for the moment might at least “feel” more compelling.
As the giant Kashagan field came on line this week, it did so without ConocoPhillips which sold its stake back to the Kazakh government for $5 billion last July, again in order to focus on US shale holdings. The field involved a $30 billion overspend following years of delay. Of course oil prices are far higher this year than expected in the 1990s, but one has to wonder how the original NPV analysis would have fared, had consortium CEOs known that it would take almost two decades and an extra $30 billion to bring the field online (currently at 180,000 b/d). In its final phase, the field is planned to produce 1.5 million b/d and gave its investors a giant, compelling asset to book. But time is also money, and capital ploughed into US shale resources can provide ready cash flow producing production in terms of months, not decades. One wonders, if ExxonMobil, Shell, ENI and Total saw another Kashagan today that wouldn’t be in production until 2033 and run tens of billions of dollars more expensive than expected, would greenlighting it instead of putting the money into shale to get more immediate results make sense?
With oil prices hovering around $110 a barrel, there is plenty of capital to deploy on drilling so corporate planners will be inclined to recommend a mix of both mega projects and unconventionals. But with an uncertain outlook for the energy world in the 2030s given the inevitable return of the price cycle and the greater possibility of stricter carbon abatement policies, a dollar earned with North American unconventional oil that can be produced today at $110 might be, as they say, money in the bank, as US independents are increasingly inclined to agree. Mexico would do well to join the bandwagon.