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March 26, 2010 2:00 am
Jim Mulva, chairman and chief executive of ConocoPhillips, believes these are difficult days for large western oil companies. His decision to halve the company’s 20 per cent stake in Lukoil, Russia's second-largest oil group, shows why.
The Lukoil relationship, first established in 2004, was seen as one of the jewels in Conoco’s crown. Alongside BP’s joint venture TNK-BP, it was the best position for any western oil group in Russia, the country with the world’s largest hydrocarbon reserves.
Yet speaking to the Financial Times this week, Mr Mulva admitted that the results had been disappointing.
“The new opportunities in Russia haven’t developed for us as quickly as we would have thought,” he said. “There have been several opportunities that were made available, but for one reason or another we felt were not that compelling and did not do.”
“The largest strategic opportunities have been reserved for 100 per cent owned Russian companies, we understand that.”
The Russian government is open to investment by western oil groups, he added. He said Conoco, the third-largest US oil group, was talking to Russia about the vast gas reserves of the Yamal peninsula, among other projects, and the Lukoil relationship would continue. However, he warned that any future deals in the country would “come more slowly” than he had once hoped.
“We think there can be opportunities for companies like ourselves; we just need to be patient,” he said.
Conoco's difficulties in Russia illustrate the central problem facing all large western oil companies: how to secure the access to oil and gas reserves needed to generate growth.
In its strategy presentation this week, Conoco included a chart showing that of the world’s conventional reserves, 73 per cent were controlled by national oil companies that allow no equity participation by foreign groups, 20 per cent are in Russia or other countries where there are national oil companies but foreign equity participation is allowed, and just 7 per cent are in countries such as the US that allow free access.
For many international oil companies, the answer has in recent years been to buy reserves in North America and Australia. That trend has been seen in ExxonMobil’s $41bn bid for XTO, and in deals by Royal Dutch Shell, Total, Statoil and Britain's BP and BG Group.
Some in the industry believe shareholders would be better off if the big oil groups simply admitted that they cannot grow, and concentrated on paying generous dividends.
It is an argument for which Mr Mulva has some sympathy. Conoco, he said, was now focused on “how do we create value for shareholders”, rather than raising its production volumes. It has a planned $10bn disposal programme mainly to reduce debt – on top of the $5bn expected from selling 10 per cent of Lukoil – which will cut out about 100,000 barrels per day of production, and the remaining 1.7m b/d is expected to remain flat for three or four years.
In the longer term, Mr Mulva said, Conoco could grow by 2-3 per cent per year. It has 43bn barrels of oil equivalent of resources that could ultimately be produced, about 80 per cent of them in developed countries. In the near term, however, it will concentrate on rewarding investors with a share buy-back, using the Lukoil proceeds, and a higher dividend. Mr Mulva plans to take the distribution ratio from about 24 per cent today to about 40 per cent, and as a sign of intent will raise the dividend by 10 per cent.
The buy-back means that while production may be flat, production per share will rise.
Conoco would like more resources, Mr Mulva said, but does not need them. The industry goes through cycles, he said, and at some point “there will be more opportunities for us than we see today”.
If he is wrong, however, it will be hard to shake off the impression that he and other big oil CEOs are in the business of managing decline.
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