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Home > Blogs > Ian Fraser > 'Big Oil' driven into blind alley by myopic investors and 'resource nationalism'

'Big Oil' driven into blind alley by myopic investors and 'resource nationalism'

Big Oil | 'Big Oil' driven into blind alley by myopic investors and 'resource nationalism' Ian Fraser

Big oil and gas companies are being pushed into a dangerous corner by a combination of “resource nationalism” - which is excluding them from the low hanging fruit in easily accessible fields - and flawed metrics that investors and analysts use to gauge their performance.

These twin pressures are driving firms like BP, Shell, ENI and Total to take ever more egregious environmental and financial risks. It was these very pressures that recently forced BP into a controversial alliance with Russia’s Rosneft via a share swap. Ironically, Rosneft is the Russian state-owned company that was handed the bulk of assets of Yukos after these were expropriated by the Russian government.

A report by Massachusetts-based Oil Change International, Platform, and Greenpeace highlights the risks associated with investor reliance on “Reserves Replacement Ratio (RRR)”. The report argues that, more than anything, the use of RRR is driving oil firms to play fast and loose with the environment in ecologically vulnerable frontier pastures like Alberta and the Arctic.

BP’s Gulf of Mexico disaster, which has caused a massive headache for UK pension funds, highlights the scale of the risks involved in chasing marginal reserves along these lines.

Goaded by short-termist analysts and investors oil firms are generally of the view they must keep their RRRs above 100%. They fear failure to do will cause them to fall out of out of favor with investors and trigger a fall in their share prices.

However, in order to do so they must take “unprecedented risks” as well as facing “escalating costs and tighter margins”, according to the 24-page report headlined Reserves Replacement Ratio: Adequate Indicator or Subprime Statistic?”. The report states:

"The bulk of the oil that remains freely accessible to IOCs is technically difficult and expensive to produce such as the Canadian tar sands, ultra-deepwater and the offshore Arctic…

We label these resources marginal oil as their high-cost and high-risk places them at the top end of the production cost curve and they are vulnerable to emerging trends towards efficiency and climate change regulation that may dampen demand growth and stabilize price...

To maintain Reserves Replacement Ratio (RRR) rates above 100%, IOCs have increasingly turned to tar sands and ultra-deepwater in the face of the continuing decline in their conventional oil fields...

Our research found that at least four of the top six IOCs have significantly relied on tar sands reserves additions to support RRR rates in the past five years. As a percentage of total liquids additions, tar sands represents between 26% and 71% of reserves additions for these four companies."

In a blog post, Lorne Stockman, report author and research director at Oil Change International, explained that in the last five reporting years, four of the top six oil companies would not have achieved RRR levels above 100% unless they had been active in Canadian tar sands. Stockman said:-

“The truth is that oil companies are running out of places to find more oil and the end game is not far off. A recent Deutsche Bank analyst report suggested that high oil prices over the next few years coupled with an accelerating decline in the cost of battery technologies for electric vehicles will precipitate a global peak in demand for oil by 2020.”

He cited research from the International Energy Agency suggesting that humanity must aggressively reduce its use of oil if it is to meet climate change goals. Meeting the climate objective means demand for oil would have to peak by 2018, said Stockman.

"So the question is: does replacing production with these risky and expensive forms of oil always make sense? While RRR is just one of many metrics used by analysts, it is one that demands strong performance in something other than simple profit generation or return on investment. It demands the constant reacquisition of a fast disappearing commodity."

Stockman wants analysts and investors to adopt a saner yardstick. He added that the oil companies' determination to "stay the course" is impeding the transition away from oil.

In a powerful presentation ("Addicted to Risk") given to a TED event last month, Naomi Klein despaired of our continued dependence on fossil fuels, also complaining that this is driving oil companies to show a cavalier disregard for environmental risk. She said:

"This is where our story about endless growth has taken us: to the tar sands, this black hole at the center of my country. A place of such planetary pain that, like the BP gusher, one can only bear to look at it for so long. As Jared Diamond and others have shown us, this is how civilizations commit suicide: by slamming their foot on the accelerator at the exact moment they should be putting on the brakes."

Further reading on risks associated with the pursuit of oil and gas reserves in marginal fields:


  • BP disaster shows that environmental and social risks are also financial risks, by Ian Fraser [Blog Post]
  • The Hidden Risks of Deep Sea Drilling, by Amarendra Swarup [White Paper]
  • 2011: The Year Ahead - Getting used to $100 oil (or $200 oil?) by Ian Fraser and Anthony Harrington [Blog Post]
  • Real Options: Opportunity from Risk by David Shimko

    Tags: big oil , Canada , oil and gas , Russian Federation , tar sands
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