2012 Could Be a Disaster for Big Oil

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The past year has been a boon for exploration and production (E&P) companies, thanks to higher crude oil prices. Oil companies -- especially Big Oil -- were able to garner comparatively higher profits despite a general drop in production. However, things might not look as rosy in 2012.

Gloom on the horizon
The World Bank has come up with a bleak 2012 outlook for developing countries due to the European debt crisis. The bank warned that an escalation in the euro-area debt crisis could tilt the world into a recession on par with the financial meltdown three years ago. The bank goes on to outline the consequences on crude oil prices, and this might mean a reduction in margins for those E&P companies that booked greater profits by relying more on higher crude oil prices than production growth.

In the report (PDF file, Adobe Acrobat required), the bank notes that "fiscal pressures could be particularly intense for oil and metal exporting countries. Falling commodity prices could cut into government revenues, causing government balances in oil exporting countries to deteriorate by more than 4 percent of GDP." The international lender also predicts that average crude oil prices will fall by 5.5% from 2011 levels.

In simpler terms, the weak economic environment in developed nations could seemingly reduce demand for crude oil, which could badly impact those countries that primarily depend on crude oil exports.

The net result: A drop in global oil prices
The World Bank average price -- which is a simple average of the crude oil benchmarks WTI, Dubai, and Brent -- is forecast to be around $98/barrel in 2012. This is a drop from $104/barrel in 2011. Not surprisingly, the report also mentions the additional risk of "a hard landing in one or more economically important middle-income countries" (read: China and India) that could further act as a catalyst for a fall in demand and lower prices.

What effect will this have on major E&P companies in the next 12 months? It depends. However, if one has to go by the production trends of 2011, then you can expect a substantive drop in margins.

Not an enviable 2011
The list starts with BP (NYSE: BP  ) , whose production levels fell 9% in the first nine months of 2011 compared to the previous year. ConocoPhillips' (NYSE: COP  ) production fell 7%, while Statoil (NYSE: STO  ) and Total (NYSE: TOT  ) saw a 3% and 2% decline, respectively. The reason cited by these companies is a general decline from currently producing fields. Only ExxonMobil (NYSE: XOM  ) registered decent growth in terms of production. Additionally, the current focus has shifted more toward natural gas production. As fellow Fool Abantika Chatterjee has noted, capital expenditures for most of these companies are slated to go up, but the major portion would be allotted to finding and developing natural gas reserves.

Thirdly, crude oil production from these companies could further witness a dip, and that might be dangerous. The geopolitical situation in the Middle East and disruptions in supply in North Africa are perfect catalysts to that. Of course, such events have the potential to push up prices, but that still might not result in a free run like E&P companies enjoyed during the Libyan crisis. The European debt crisis, after all, has consequences that are more far-reaching and difficult to resolve. The balance looks dicey. In short, the downside for 2012 looks much more prominent than the upside if oil production levels are to take a beating.

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Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Statoil A and Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 23, 2012, at 3:48 PM, mcgratpc wrote:

    Your research is so basic. BP sold a lot of assets between 2010 and 2011 to help fund the Macondo clean-up and liabilities. That is the main reason for the drop not generally declining production.

  • Report this Comment On January 23, 2012, at 4:29 PM, IlliniBanker wrote:

    Kudos to mcgratpc for pointing out the obvious that TMF missed. Additionally, Total lost production on Libya and others sold off oil interests to get into the booming natgas patch.

    Meanwhile, global spare oil capacity is balanced on a razor's edge. Ghawar production is plateauing and demand from the emerging markets continues to climb as more and more people enter the middle-class.

    I respect the technical analysis that helped originate this article- commodities do tend to revert to their inflation-adjusted trend over the long run. Supply will eventually catch up with demand, but the commodities cycle tends to run 15-17 years and we're only ~11-12 years in.

    Also, The Motley Fool wrote a bearish article about this last year.

    Guys; please. Do some research and add some nuance to this. This article looks hastily thrown together, inspires fear rather than illuminates, and just isn't up to par for Motley Fool article.

  • Report this Comment On January 23, 2012, at 5:50 PM, Sunny7039 wrote:

    I think a contrarian view is useful, especially when we get a link to a detailed analysis. (Hint, hint . . . seriously, though, keep those solid links to real research coming, please!)

    I also think that for the past five years, if not the past decade, anyone holding stocks sensitive to the price of any commodity, and especially basic materials commodities, has got to have an exit strategy. (Easier said than done! :/ )

    Furthermore, a serious dip in oil is not only possible, but could turn out to be the buying opportunity of this decade.

    "Could" isn't meant as a weasel word, but an acknowledgement of the risks. IOW, I don't know, and maybe no one else does, either. And maybe no one can give you a degree of certainty that is acceptable for your investments.

    If I were forced to guess, my intuition tells me "volatility" -- i.e., even more volatility than we've seen recently. Which would also mean that someone, somewhere, is going to make a bundle.

    These used to be buy-and-hold stocks that retired people held for decades, for income to cover real necessities. Seems like that's over. I think that when it comes to oil, natural gas, metals, basic foodstuffs, fertilizers, etc., the actions of a relatively small number of people have an inordinately large effect on the prices. Not a good thing.

  • Report this Comment On January 23, 2012, at 7:10 PM, Regarded49 wrote:

    This article is a joke right? It cannot be serious! LOLOL.....the largest companies in the world, a declining natural resource and growing demand from emerging must be kidding!

    Plus they pay dividends to boot, and keep raising them......nahh, cant be a serious article.

  • Report this Comment On January 24, 2012, at 12:51 AM, isacsimon wrote:


    I understand that BP has sold off some of its assets post the tragedy to help fund the clean-up.

    However, the point I'm trying to make is from a macro-economic level, The intention was not to single out any particular company, but point out a general trend. BP may very well boost production in the coming months with its recent acquisitions in Trinidad & Tobago, India and offshore Angola. (

    Still the question that needs to be answered is, will these acquisitions contribute to a production hike in 2012, so as to compensate for a possible drop in global crude prices?

    PS: Again, this question need to be asked to all companies in general.

  • Report this Comment On January 24, 2012, at 12:58 AM, isacsimon wrote:

    @ IlliniBanker

    <<demand from the emerging markets continues to climb as more and more people enter the middle-class.>>

    China & India contribute to a major chunk of demand from emerging markets. However, a hard landing in the two of the largest emerging economies this year can't be ruled out. This might, though temporarily, see the demand growth curve leveling off,


  • Report this Comment On January 24, 2012, at 1:01 AM, isacsimon wrote:

    @ Sunny7039

    <<Furthermore, a serious dip in oil is not only possible, but could turn out to be the buying opportunity of this decade.>>


    Fool on!


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