International oil companies optimize their business layout

Reserves are the key index for the sustainable development of oil gas companies, also the key basis for the evaluation ranking of oil companies by organizations media. Analyzed by Z-Adviser Energy in early May, IOCs' proved reserves fell 13 billion barrels last year, existing reserves could run out in less than 15 years. Proven global reserves in the first quarter of this year were 1.2bn barrels, the lowest in seven years. In addition, Shell's oil gas reserve life has fallen below eight years for six consecutive years, BP no longer considers reserve replacement ratio as a strategic performance target. What are the reasons for the decline in global proved reserves? What are the implications for oil companies the global oil market? How will the oil companies respond?

Global investment in oil gas exploration is at a low ebb

The global newly discovered reserves in 2020 are at the low level in the past decade. A total of 179 oil gas discoveries were made last year, mainly in the Middle East, Africa Latin America, according to the 2020 Domestic Foreign Oil Gas Industry Development Report released in April. New discoveries of oil gas reserves of 1.95 billion tons of oil equivalent, a sharp drop of 30 percent year on year. Among them, the newly added proved reserves of oil natural gas declined by 11% 43% year-on-year.

Investment in exploration was shrinking rapidly in almost every sector last year, hit by low oil prices. Investors remained more cautious than ever about upstream projects, with global E&P investment spending falling $133.2 billion, 30%, to $309 billion. Global oil gas industry discoveries in the first quarter totaled 1.2bn barrels of oil equivalent, the lowest level in seven years.

The six largest international oil companies have seen significant declines in proven oil gas reserves, according to Z-Z Energy. ExxonMobil's proved reserves fell by 7 billion barrels in 2020, 30 percent a year earlier. Shell's proved reserves fell 20 per cent to 9bn barrels last year. Chevron lost 2 billion barrels BP lost 1 billion barrels due to impairment charges. Only Total Eni have avoided a decline in proven reserves over the past decade.

What are the reasons for the decline in global proved reserves?

The impact of COVID-19 on the oil industry is the main reason. Last year, the global economy was in deep recession. The drop in world oil demand was the largest in history, the international oil price plummeted deeply. The spread of COVID-19 has only severely affected the oil gas industry, but also the business performance of international oil companies. The five major international oil companies suffered a combined loss of US $72.21 billion for the whole year, "the whole industry chain fell together". For the industry as a whole, poor financial performance uncertainty over demand oil prices have reduced upstream investment, with E&P companies cutting investment budgets to preserve cash flow.

The COVID-19 impact on upstream investment last year this year is expected to be as high as $285bn, while spending will slowly increase 2022, it will reach pre-crisis levels for some time to come. Spending fell by about $145 billion last year will fall by $140 billion this year. This means that COVID-19 has led to a 27 per cent reduction in investment the original plan.

Moreover, growing investor concern about climate change policy is discouraging oil companies injecting capital. Targets for climate action also put oil companies in a bind. The United States has rejoined the Paris climate agreement, proposing unprecedented investments in clean energy beginning to reverse many of its previous regulations. In April, the AOL Virtual Climate Summit unveiled an ambitious 10-year climate plan that aims to cut U.S. greenhouse gas emissions by 50 to 52 percent by 2030.

Oil companies adjust their investment plans to stabilize the supply of oil gas facing greater challenges

The immediate effect of declining reserves is a decline in oil production. In 2020, global oil production was 4.17 billion tons, down 310 million tons year on year, down by 7.1%. Seven countries, including Russia, Saudi Arabia, Iraq the United States, saw their output drop by more than 20 million tons. Upstream costs are forecast to be 5 per cent lower this year than in 2019, but capex will fall by 33 per cent, further undermining the ability of upstream investment to translate into production, leading to anemic production growth.

First, new discoveries are a measure of oil companies' exploration performance. It is safe to say that E&P is becoming increasingly challenging as investments shrink success rates decline, could pose serious challenges for major oil companies like Exxon Mobil, BP, Shell to maintain stable production levels in the years ahead.

Proven reserves at the big international oil companies fell 15 per cent last year could run out within the next 15 years as new oil finds each year fall short of annual production, according to analysis by Z-Advisors Energy. In BP's Energy Outlook 2020, chief executive Bernard Rooney said the company would increase spending on renewables 20-fold to $5 billion a year by 2030, without entering any new countries for oil gas exploration.

'The ability of the oil majors to generate revenue in the future will continue to depend on the amount of oil gas available for sale,' said John Chopra, vice president of upstream research at RZ-Z Energy. If reserves are insufficient to sustain production levels, companies will struggle to fund expensive energy-transition projects slow down their clean energy plans.

Second, the oil market will face a supply crunch before demand peaks, which could accelerate the shift away fossil fuels to cleaner energy sources. Oil demand has peaked concerns about carbon emissions climate change mean the world's oil reserves are increasingly unlikely to run out, according to Ben van Beurden, Shell's chief executive.

Under the influence of long-term changes in government policies, oil companies' future investment plans for new production capacity are more variable. By the end of this year, the combined debt of the 55 internationally listed international oil companies, NOCs independents is expected to reach an all-time high of $930bn, repaying that debt will drain a lot of cash flow in the coming years.

By the end of 2020, 1.5 million b/d of refining capacity has been announced in Europe, the United States the Asia-Pacific region, with some traditional refining projects being postponed cancelled due to reduced demand. International oil companies have also started selling refining assets, suspending refining projects reducing refining capacity.

In addition, the decline in upstream related tendering activity will also result in a significant reduction in oil gas asset deals. For example, there were six Russia-Central Asia asset deals in 2020, with a total value of just $820m, down $8.4bn in 2019. On Feb. 2, Trafigura, the global commodities trader, paid 700 million euros for a 10 percent stake in Russian oil company Orient Oil.

Oil companies optimize business mix strive to create an upgraded version of traditional industries

The pandemic, energy transition electrification have led some energy consultants to bring forward lower the peak of global oil demand, but oil gas are still the dominant energy sources will remain so for a long time to come.

In 2020, global primary energy consumption declined for the first time in nearly a decade, dropping by about 4.6 percent year on year. Energy-related investment fell by 15% to 20%, of which fossil energy investment fell by about 30%. In this context, oil companies will continue to focus their investments on low-risk, short-cycle, low-cost, promising projects, focusing on providing low-cost, clean oil gas.

U.S. oil companies remain bullish on traditional oil gas businesses focus on building a portfolio with oil gas assets at its core. The divestitures are mainly non-core assets to ease a cash flow shortfall in response to low oil prices. For example, Chevron's 2020 sale of non-core oil gas assets in Azerbaijan will be followed by further sales of assets defined as low priority, such as onshore shallow water in Nigeria, deepwater gas in Indonesia LNG projects in Australia. ExxonMobil is selling assets in Malaysia exiting the UK North Sea altogether. Chevron is buying Nobel Energy for $13 billion.

The big international oil companies continue to shrink their refining operations. Shell plans to reshape its refining business, selling off about half of the world's refineries moving toward a smaller, smarter portfolio of refineries as refining margins continue to fall amid sluggish demand for refined products. BP sold its global chemicals business to Ineos for $5 billion, arguing that its chemical business was well aligned with the rest of the company did match its green low-carbon transformation goals.

In order to stabilize the company's income improve the ability to resist risks, the national oil companies actively adjust the downstream layout. Among them, in order to enhance the competitiveness of the whole industrial chain, Saudi Aramco restructured its downstream business completed the acquisition of 70% shares of Saudi Basic Industries Corporation with a price of 69 billion US dollars. Meanwhile, it planned to acquire shares of refining chemical business of Reliance Industries Corporation of India with a price of 15 billion US dollars. Eni, which specialises in bio-refineries, plans to exit traditional refining activities within 10 years.

The sales model of international major oil companies is also gradually transforming the previous model of production, transformation sales to consumers to a reverse cycle centered on consumers. For example, BP has promoted the reform of sales terminals in North America to increase the added value of sales at consumer terminals by studying consumer habits. Shell has completed the integration of the "refuel-charge" payment system across the UK to improve customer ease of use.

In addition, international oil companies are doing a number of things to reduce costs. By cutting operating costs, reducing staff salaries, accelerating the application of digital intelligence other means to reverse the severe loss of business performance.

In general, oil companies are actively adjusting their business portfolios to adapt to new industry trends. The decline in reserves does mean that oil companies are in decline, but rather that oil companies are exploring new opportunities.

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Source: International Petroleum Network