Big Oil, big trouble

Profits are plunging at major oil companies, with Shell cutting back on exploration and extraction.

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Shell's got nothing to smile about

Last year was a tough one for the giant oil companies. BP made an annual loss of $5.2bn, while its four major rivals saw their profits plunge by anything from 18% (in the case of Total) to 80% (in the case of Royal Dutch Shell). As a result, they are drastically cutting back on investment in exploration and extraction, with just nine out of 230 potential projects likely to be approved this year.

Some in the industry are even asking "whether the business model of large international oil companies" is "fundamentally flawed", say Ed Crooks and Chris Adams in the Financial Times. The combination of huge capital investment in the mega-projects they prefer and their investors' expectations of large dividends are putting a growing strain on their finances.

Certainly, anybody looking for reasons to be optimistic about their future didn't find it at International Petroleum Week, the industry's annual get-together, say Andy Hoffman, Grant Smith, Javier Blas and Angela Rascouet on Bloomberg.com. Attendees were "greeted by a cacophony of voices" delivering the same message: "the world is awash with oil". Bearish analysts think that "prices will stay low for up to a decade as Chinese economic growth slows and the US shale industry acts as a cap on any rally".

By some estimates, supply exceeds demand by as much as 1.7 million barrels per day. Bob Dudley, chief executive of BP, joked that the glut "is so extreme that people could soon be fillingtheir swimming pools with crude".

Still, if the major firms are suffering, the situation for smaller US shale oil and gas firms who are in part responsible for the glut is even more dire. Until recently, firms that had hedged against falling prices effectively sold their production in advance were cushioned from the worst of the falls. But recently "most of those hedges expired, leaving a number of oil companies low on cash and unable to pay their debt", say Clifford Krauss and Michael Corkery in The New York Times.

Now, "lenders are realising that a recovery in oil prices is at least a year away, too long for many companies to hold out". Hence the industry is bracing itself for a wave of bankruptcies a development that could bail out Big Oil. "Many billions of barrels of reserves in the shale fields could be coming on to the market, priced to sell so creditors can collect their cash," say Crooks and Adams, potentially allowing the majors to pick up these less capital-intensive, more-flexible assets at bargain prices.

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