The US oil and gas industry has tremendous financial strength, but it is "opportunity constrained" because legacy assets that sustained companies for decades are very mature, said Marathon Oil Corp. CEO and Pres. Clarence P. Cazalot Jr.
"I can assure you—with almost $40/bbl oil and $6/Mcf gas—that if companies today had a large inventory of near-term exploitation, development wells that they could drill or work over, they would be doing it," Cazalot said. "Much to the chagrin of the oil companies and the service companies, we are not seeing the big uptick in seismic activity and drilling activity simply because the opportunity set is not there."
Meanwhile, some oil companies have launched share buyback programs in efforts to create more value for existing shareholders, but share buyback programs do not find new oil and gas reserves, he noted during a June 17 speech to a Houston energy conference.
"Ordinarily, you wouldn't see much consolidation in a high-priced environment because the price of assets gets quite high. But we continue to see consolidation under way, much of it taking place among the smaller companies. I think that we will continue to see consolidation of the larger companies because of the need to replenish their asset base, their opportunity set," he said.
Reserves access
The most critical issue facing integrated oil and gas companies is access to profitable resources that can significantly impact a company's future operations, Cazalot said.
"All of us are challenged to more than replace our reserves every year. If you want to grow production at 3%/year, you have to replace about 140%[/year] of your production...in order to maintain the same reserve life on your reserve base. As the supermajors have come about and gotten quite large, the challenge is even bigger for them," he said.
National oil companies and large Russian companies control 80% of the world's proved oil and gas reserves, and perhaps a comparable percentage of the probable and possible reserves, he noted.
"That means that the rest of us, from ExxonMobil Corp. on down to independents, have access to only about 20% of the world's proved reserves today. You can see that the ability to access those large resource bases, much of which is off-limits to us, is absolutely critical to our future. Companies that find creative, innovative ways of working in partnerships with national oil companies to access those resources are going to be the survivors of the future," Cazalot said.
Meanwhile, the upstream industry is seeing the emergence of many new competitors, such as Chinese companies looking to invest in Saudi Arabia and elsewhere in the Middle East.
"In many cases, those competitors have the advantage of state-to-state relationships that publicly traded companies don't have," he noted. "I think you will continue to see continuing relationships out there between major crude oil exporters, natural gas exporters, and the major market holdersUaccess to markets for oil and gas is absolutely essential."
Downstream sector
"We believe at Marathon that we are reaching a golden age of US refining. I certainly don't believe we are always going to see gasoline prices at the level that they are at today. There has not been a new refinery built in the US since 1976, and that was our refinery in Garyville, La., just north of New Orleans on the Mississippi River," Cazalot said of the 245,000 b/d plant.
The industry is not investing in new refining capacity because it's spending massive sums to upgrade existing refineries to meet new clean fuel standards, he said.
"Marathon alone will invest $900 million over the 2002-06 timeframe. There is a little bit of additional capacity that we picked up in that, but most of that is just staying-in-business investment," he said.
Overall, Marathon is "very bullish on refining, particularly in the US Midwest," he noted. The company is acquiring the Covington, Ky.-based Ashland Inc.'s 38% stake in Marathon Ashland Petroleum LLP for $2.93 billion. Marathon already holds a 62% in Findlay, Ohio-based MAP (OGJ, Apr. 5, 2004, p. 37).
