Rising Oil-Exploration Costs and Decreasing Stock Market Values Make Takeovers Likely
May 1, 2015
The costs of finding oil are on the rise. The value of some smaller oil companies have tumbled. For the world's biggest crude producers, this leads to one question: Is it cheaper to buy someone else's oil or dig for it?
The rising costs of finding and producing oil were eating into profits even before global crude prices began to slide last summer from over $100 a barrel to about $66 today. The price collapse has intensified a push by companies to cut costs and shed less-profitable operations.
- Since 2010, Exxon has spent an average of $29 billion a year on finding and tapping oil and gas, adding an average of 1.5 billion barrels a year to its proved reserves — the inventory of fuels it can pump at profit. That works out to about $19 per barrel.
- Exxon could produce almost the same amount of fuel for less money by buying a smaller rival now that energy companies' stock market values have fallen along with the price of crude. For example, shale-oil driller Continental Resources Inc. has 1.35 billion barrels of proved reserves and a stock-market value of less than $20 billion — or less than $15 a barrel of proved reserves.
For years, Exxon saved money by reducing its global workforce, which is down by almost one-third since its 1999 merger with Mobil Corp. Exxon now has fewer employees than 20 years ago and pumps 50 percent more oil and gas. Nevertheless, getting bigger today might not create the savings energy companies are seeking. Instead, companies will make deals to fill in gaps in their holdings or to building on existing strengths, as Shell proposes to do by swallowing BG Group.
Source: Daniel Gilbert, "Majors' Quandary: Why Drill for Oil When They Can Buy Somebody Else's?" Wall Street Journal, April 29, 2015.
Browse more articles on Environment Issues