|Monday, 25 June 2007|
IT'S not every day that someone compares an oil major with a boiling lobster, but this week Slugcatcher will explain why there is a fascinating link between the two.
Let's start with last week's big news event, which many media outlets allowed to slide by without comment – the third consecutive year of oil exploration failure by the majors.
To its credit PetroleumNews.net acknowledged this fact in a Friday story, but the six paragraphs allocated to reporting a momentous development in the oil game barely acknowledges its significance.
The basis of the exploration failure was a study by the respected New York investment bank, Bear Stearns. It found that not only did discovery cost rise by 28% last year to $US13.63 a barrel, but that the reserve replacement ratio (RRP) slipped to 91%.
This was the third consecutive year that the RRP has been below 100% and in Slugcatcher's book that means we now clearly have a trend of consistent decline in discovery despite a consistent rise in the price of oil.
"So what?", say some readers. We know that discovery is getting harder, deeper and more expensive.
But what most readers forget is the powerful effect on a system of slow, but consistent, change. Glaciers, and the interest rate on 10-year US Treasury bonds, are other examples of something so big that we fail to notice their movements.
Lobsters, the other key ingredient in this week's random thoughts, should be very familiar with what might best be called a slow burn – at least that would be true if lobsters had the brains to pass on their collective wisdom in the same way people are supposed to.
Drop a lobster, as the saying goes, into a pot of boiling water and it will jump straight out. Why? Because there is a sudden shock to the system and a sharp reaction is produced.
Lower the lobster into a pot of cool water, and take it to the boil, and the lobster is literally cooked to death.
What you see with the lobster, so you see with big oil. It is being slowly cooked to death by a coalescing of influences such as the need to explore in deeper and more distant geology, and exclusion from some of the best exploration targets in the world because Arab states, the Russians, and their friends in the "Stan States", either don't like big western oil companies – or the big western oil companies have learned expensive lessons from trusting Arabs, Russians, or Stans.
The key fact of what's happening, the amazing shrinkage of big oil, cannot be denied. For three consecutive years, despite the best oil prices in memory, discovery has failed to deliver.
To think that this trend will suddenly reverse this year, or next, is folly. The writing is on the wall.
Isn't that the question we should all be asking. Now that we can see that the lobster (sorry, big oil) is slowly being cooked to death, what happens?
In the time (and space) left these are Slugcatcher's thoughts.
Takeover time is upon us because big oil has, traditionally, always fallen back on mergers and acquisitions when growth cannot be achieved by discovery.
The oil price will continue to rise because discovery in the western world has slowed dramatically and the Arabs, Russians and Stans see oil as their "power play" ticket in world affairs.
Small oil companies will grow much more rapidly than big oil because they're happy to explore and develop small oil pools, and because some of them will find a way onto Arab land since they're small and non-threatening.
Nuclear power, and curious alternatives such as hydrogen from coal, will blossom as the oil price continues to rise.
Investment tipping is not part of Slugcatcher's brief but as the latest RRP data is digested, surely it makes small oil companies with big (and perhaps undeveloped reserves) excellent future performers? Lobster, anyone?
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