Super major and major oil companies are heading for an uncertain future, while top tier national and independent oil companies are increasingly dominating global exploration and production.

That was the sobering message given to AAPG conference delegates by Murphy Malaysia Exploration General Manager, Jack Kerfoot. He said while private companies enjoyed autonomy of financial and corporate control, national oil companies (NOCs) had strategic advantages because of their close relationship with their own governments and other governments that also owned NOCs.

He said the super majors (classified as having a market capitalisation of more than $US 100 billion) and majors (market capitalisation between $US 30 - $US 100 billion) had dropped the baton on exploration and service companies were now the prime drivers of new exploration technologies.

He said factors contributing to the majors’ decline included lower production, escalating costs and a lack of sustainable growth programmes. In 1972 the majors contributed 93% of the top 10 global production figure of 29,543 MMbopd with NOCs contributing the remaining 7%. By 2002, NOCs contributed 77% of the top 10 global production figure of 48,115 MMbopd while the super majors were down to 23%.

“Now the super majors are starting to focus their capital not on initial exploration, but on heavy oil and shale oil, perhaps as a way to mitigate geological risk which they may no longer be comfortable with. But there is a certain financial risk with heavy oil when the price of oil goes below $US 30 bbl. The economics are, shall we say, challenging.”

Kerfoot said the loss of exploration expertise was also another major contributing factor behind the decline. “You lose expertise any time that you do not continue to practice or continue to emphasise that exploration is a core business”, he said. Between 1975–79 the majors were drilling 6,260 wildcats a year, but that had dropped to 1,211 between 2000-04, although the total number of wildcats drilled globally had fallen from 50,081 to 20,186, respectively. But that is still an 81% drop in exploration drilling by the super majors and majors over a 30 year period.

“What we see year in and year out is 80% of the exploration for the last 30 years has been drilled by independents. And in fact, what we actually see today is the NOCs are drilling twice as many wildcats as the majors. The majors no longer contribute to significant global exploration, they have lost that expertise.”

It has, in effect, been outsourced to service companies who are now the industry leaders in developing new technologies, as can be seen by the number of new patents being applied for by both the upstream and downstream industries, Kerfoot said. He said there were about 100 patents awarded to the top four super majors from the mid 1990s to 2005, with more than half of them for downstream applications.

The top four service companies applied for more than 800 patents in 2004, with about 99% for upstream uses. “So the difference in patents between the super majors and the service companies was greater than 16 to 1”, he said. The major users of this new technology are the independent companies who are picking it up much faster than the super majors and majors.

“In 2005 the company that used more new Schlumberger technology than anyone else in the world was Murphy Malaysia and, quite simply, the reason was, when they came to us with an opportunity to try new technology our response time was one or two days”, Kerfoot said. “We meet with them, we understand what the risks are and how we would implement that technology, we make a decision and we go forward.”

He said service companies often wanted a technical paper published on the performance of their new technologies, and again the turnaround time for approval from independents is vastly quicker than it is for majors. “Our publication process is very simple”, he said. “We first need our partner, Petronas Carigali, to approve it and that usually takes 30 – 60 days. I’m told approval from the super majors typically takes 1-3 years.”

“Additionally, when we use it, we work closely with our partner, Petronas Carigali, and the service companies find that Petronas Carigali is using that new technology within three months domestically and another six months internationally if it has been successful.”

Kerfoot outlined the history of the oil industry since the late 1800s and broke the era up into three distinct periods: rapid growth of private companies until the late 1930s arrival of the NOCs, firstly in the 1950s and then again during the early 1970s, and the ongoing consolidation or acquisitions of private companies.

He said demand for oil and gas was created from the industrial revolution and the proliferation of US oil companies was made possible by a range of factors including the relatively easy land access and large number of producing basins. European companies got into the oil business by mainly exploiting the resources of their colonies.

“The major outcomes of this period were the growth of new companies and an explosion of new technologies like rotary tools, wireline logging and seismic technology and the development of human resources”, Kerfoot said.

He said the first NOC to be formed was Mexico’s Pimex in the early 1930s. “But we really see two distinct periods of NOC growth.” The first was after World War II when many former colonies were granted independence and war-ravaged countries formed their own NOCs to manage and optimise their resources.

“The next wave we saw starting in the early 70s, about the time oil starts to escalate in price.” He said the economic drivers behind the formation of NOCs were a desire for some countries to manage their own petroleum resources. “Many of those NOCs then started to look beyond their country boundaries and got into the global oil and gas business.”

“They started to focus on capabilities, including expertise, human resource development and technology, just like the private sector did earlier in the century.” Kerfoot said these developments led to the super majors and majors starting to lose their production dominance, with eight of the top 10 oil companies from the private sector in 1972, falling to only three in 2002.

Using Asia as an example, bounded by Pakistan to Japan and south to Papua New Guinea, Kerfoot said the number of wildcat wells drilled by the super majors and majors had plummeted from 346 during 1975-79, to 150 during 2000-04. But wildcat drilling was heading north for the NOCs, particularly in India and China, over the same period from 311 to 901 an increase from 27% of 1,153 wells drilled to 60% of 1,501 wells drilled. NOC wildcat production almost doubled during the mid 1980s.

“So when someone asks you when did the growth boom start in China or India, the answer is actually in the mid 80s”, Kerfoot said. “They started investing in the country when they were asked to fuel their business growth.”

“What we see today is that 60% of the wildcat drilling in Asia is by NOCs and the majors have significantly dropped their exploration in the region. We are in a period right now that is dominated by the NOCs which are focused on organic growth and they do truly dominate the energy industry.” The independent companies had a 13% drop in wildcat drilling activity in Asia, from 43% (or 496 wells) to 30% or (450 wells) over the same period.

Kerfoot said the third major growth period is the consolidation or acquisition of private companies, which he said started to gather pace in the mid 1980s. “In every one of these acquisitions, the company that was acquired wanted to be acquired because they were faced with escalating costs, decreasing production and no organic growth or exploration to replace reserves”, he said. “There are fewer and fewer companies left to acquire, and of course what we are faced with today is the NOCs. These companies are out there with substantial resources and technical capabilities and they are looking for opportunities.”

Kerfoot believes the consolidation of the private sector companies still has some legs left and expects the top five remaining super majors and majors will become two or three before 2016. “The majors are facing increasing competition from the NOCs and I do not see that changing, in fact I see the competition getting even more intense”, he said.