IN THE DARK AGES

Supermajors suffer from self-inflicted wounds as well as falling oil prices

FLORENCE is a city more associated with oil on paintings and salads than the stuff that comes out of the ground. Yet every February GE, an engineering conglomerate that makes machinery in the city, gathers oil executives there to discuss the industry. This year there was more than a touch of mea culpa in the air. “The oil and gas industry is in need of its own renaissance,” admitted Harry Brekelmans, head of technology at Royal Dutch Shell, an Anglo-Dutch oil major.

A spate of gloomy year- end earnings reports underscored how bad things already were in the final quarter of 2015, in the good old days when oil prices averaged $44 a barrel (on February 2nd they hovered around $30 a barrel). Britain’s BP reported an unexpected loss of $6.5 billion in 2015, one of its worst on record. That followed news of a fourth-quarter loss by Chevron, an American counterpart. Exxon Mobil, America’s biggest oil major, made a relatively healthy $16.2 billion in 2015, but that was still half the prior year’s profit (like Chevron it is losing money drilling for oil in America). Shell’s profits also dived. In Florence an executive quipped that the industry had turned into “a gi- ant non-profit”.

Companies are slashing jobs, costs and capital spending to maintain promised dividend payouts. But the lower prices go, the more they borrow to honour those pledges. Exxon Mobil and Chevron piled on $9.6 billion and $10.8 billion of debt respectively during 2015, and BP added $4.6 billion. Standard & Poor’s, a rating agency, downgraded Chevron and Shell this week and is reviewing BP and Exxon Mobil, partly because of their rising debts. A downgrade of the latter would be significant: Exxon Mobil is one of only three American companies whose AAA rating is higher than the government’s.

Falling oil prices may have upended the industry but it also has itself to blame for its troubles. Retur ns of private global oil companies peaked a decade ago, well before crude hit record highs, indicating that they squandered the boom on vanity projects aimed at increasing production, with little thought for profitability.

In Florence the engineers and geologists who run the rigs, wells and pipelines admitted that costs soared uncontrollably as high prices led them to search for increasingly hard-to-access oil. Shell’s Mr Brekelmans says that between 1996 and 2014 capital costs per barrel quadrupled, clobbering productivity. Partly this was because equipment costs mounted as prices of steel and other commodities rose. But Thierry Pilenko, chief executive of Technip, a French engineering fir m, says it was also due to “pure inefficiency”. He says the number of man-hours to operate a piece of equipment doubled in a decade despite computerisation, and even simple valves come with documents 80 pages long.

Energy firms have failed to embrace digital systems to improve performance along the supply chain. The industry is riddled with unplanned shutdowns that raise costs. Standards vary so much that one firm ended up with 127 different colours for subsea equipment that only fish would ever see. Tech advocates like GE naturally hope that the latest crisis will spur a “technological revolution”. For now, though, survival is the priority.