Friday, March 21, 2014

There Is Something Going On Here

Social change works best with consensus, but if you can't get that, then try the bottom line. This is the dynamic taking place in the upstream or exploration and production (E&P) of the oil business. Investors are on the case of upstream companies. These companies are spending too much capital on E&P and not enough on dividends to the investors. Investor pressure has even morph into the environmental risks/high capital expenditure projects such as deep water exploration and tar sands.

There is a transition lurking in the oil industry. It concerns environmental penalities or carbon tax associated with the production of high carbon fossil fuels from tar sands. Also costly government regulations that raise exploration and production operating costs of deep-water projects especially since the Deep-Water Horizon catastrophe in the Gulf of Mexico in 2010.

Regarding the former, we read today that Exxon Mobile will provide a report to investors on the capital costs associated with these high risks E&P projects. It is the first time a company has provided investors with such information.

An undisclosed wealth management group was the impetus for Exxon's startling disclosure. Most E&P companies have refused to comply with any such financial data.  Whether a precedence is being set is not possible to speculate on at this time however as Natasha Lamb of Arjuna Capital notes: "Shareholder value is at stake if companies are not prepared for a low-carbon scenario…". Lamb goes on to say: "Forward thinking companies need to reassess how they allocate shareholder capital and act strategically to shift their business models…".

Right now, in Houston, we are experiencing another oil and possibly natural gas boom. Commercial and residential construction is exploding along with increase property taxes. The property taxes are rising because of high demand and a low high-end housing inventory. Office space is a on the rise and cost per square foot is about fourth in the nation. All this is directly and indirectly link to upstream, midstream and downstream oil and gas. Investor demands for prudent capital spending by energy companies and the anticipated low-carbon scenario discussed by Natasha Lamb could thwart the boom. But such is the Ying/Yang that is the 21st century energy business.

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