Newest leaders at oil majors change the game
With Michael Wirth named as the next CEO of Chevron a few days ago, four of the biggest integrated energy companies are headed by seasoned executives who spent the bulk of their careers in the so-called downstream part of the business.
The companies include Exxon Mobil, Royal Dutch Shell and Total of France. Downstream usually includes refining and petrochemicals, but some of the executives also worked in pipeline divisions (midstream) or trading. This leadership trend has implications the industry and investors need to keep a close eye on, and understanding what got us here is key.
Over a long period, the focus of these companies was on replacing the reserves produced during the previous year. Wall Street focused on the reserve replacement ratio as a measure of the long-term viability of companies in the industry. It was a traditional but narrow measure of future performance, especially as international contracts shifted from legal ownership of resources to something more like service contracts in which companies were compensated by a formula based mostly on achieving production goals.
For decades, this reserve replacement ratio approach suited the companies because their greatest profit margins were usually earned by producing and selling crude oil. There were substantial technical risks in finding significant resources.
Before the recent advances in seismic technology and the shale play, exploration was, in football terms, a passing game. Not every well or pass was successful, but when they were, the team advanced far down the field. Returns on investment for oil exploration could exceed 30 percent, so a few dry wells could be accepted when the fifth or sixth was often even more successful than expected. This motivated entrepreneurs in the industry since the 1860s. But even as the industry matured and consolidated, the “explorers” pretty consistently were risk takers. Their personal styles were usually optimistic — they had to be to get past the dry holes on the path to success. A dry hole meant you were that much