Processing Magazine

More consolidation likely in oil industry between Big Oil and independents

November 19, 2008

Big Oil is set to spend billions on new exploration in 2009, but in addition to ocean beds thousands of feet below the water''s surface, major producers are surveying the balance sheets of vulnerable companies in the sector, according to the Associated Press. Major oil companies are sitting on enormous piles of cash after posting record profits in recent quarters, while crumbling stock and crude prices have made many smaller oil and gas companies potential targets. The disparity in the energy sector comes as Exxon Mobil Corp., BP PLC and other oil giants find it increasingly difficult to secure new sources of fossil fuels the old-fashioned way -- exploring and drilling for them. Smaller producers that don''t have the same massive capital reserves have been stung by a credit crisis that''s severely limited or even paralyzed their ability to finance new exploration and production. In the long run, consumers could benefit if the deep-pocketed majors step in and finish some projects that might otherwise go undeveloped by smaller, struggling producers. Increased production puts downward pressure on prices. Even though most people recognize the names of the giant multinationals -- Exxon Mobil, Shell, BP and others -- they control less than 10 percent of the world''s oil reserves. Most proven reserves -- about 80 percent -- are held by national, state-run companies like those in Venezuela and Saudi Arabia. As for the majors grabbing too big a share of the production business, it''s important to keep in mind the majority of crude and natural gas is supplied by smaller, independent companies. Altogether, the nation''s roughly 5,000 independent operators account for 68 percent of oil and 82 percent of the natural gas produced in the U.S., according to the Independent Petroleum Association of America. In the past, Big Oil has shown restraint on potential buying sprees, even when flush with cash. The percentage they''ve spent on acquisitions has remained flat for the past several years, in the low-single digits.