Warren Buffett's decision to ditch Berkshire Hathaway's stakes in Exxon Mobil and ConocoPhillips suggests at least one high-profile investor is wise to Big Oil's opportunity deficit. State-owned oil companies sit on some of the world's best fields, lumping western producers with the leftovers. High prices subsidised ever-bolder engineering projects during the boom years. If lower prices linger, a lack of good alternatives may push oil majors into another round of consolidation.
The problem is structural. Nearly 80 per cent of the global reserves of black gold are now controlled by national oil companies. The likes of Exxon, Shell, BP and Chevron have dibs on just seven per cent. Apart from shale oil, most new large deposits where western majors do have free rein tend to be in remote places like deep water or above the Arctic Circle. Majors have also invested billions in natural gas, where access is less problematic. The relative dearth of easily available oil forced majors to spend more while output was falling. Exxon spent over $38 billion on oil exploration and development in 2013 - more than three times what it spent a decade earlier. Yet Exxon's daily output, measured in barrels of oil equivalent, fell slightly over the period, according to Thomson Reuters data.
The situation was tolerable when the price of crude remained above $100 a barrel. But the almost 50 per cent decline since last summer will create problems. So far, 90 oil companies have cut capital spending for this year to a total of $312 billon, down from $400 billion in 2014, according to Morgan Stanley estimates.
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Strong oil majors might take advantage of the rout to pick up some low-cost barrels from financially constrained independents. These explorers control 13 per cent of the world's oil reserves. If the slump persists, however, even the industry's biggest companies may feel pressure to start running the numbers on more ambitious cost-cutting mergers.
