Bleak Outlook for Ultramajors

Bleak Outlook for UltramajorsBleak Outlook for Ultramajors

The $64 billion tie-up of Royal Dutch Shell with BG Group and the steady growth of Exxon Mobil Corp. are creating a new league of two: the ultramajors.

But as oil and gas prices have tumbled, Exxon and Shell have been forced to retreat, with one analyst suggesting that size matters in an oil industry hit hard by continuously low prices, Bloomberg reported. “Scale was very important in the late 1990s and 2000s,” said Michele Della Vigna, the top oil-industry analyst at Goldman Sachs Group Inc.

“In the past there was scarcity of capital. Being big was an advantage. The last 15 years were about being bigger. Today is about being nimbler and lower on the cost curve.”

Exxon produces more than 4 million barrels of oil equivalent a day, while Shell has narrowed the gap with its American rival, pumping 3.7 million a day thanks to the extra barrels from BG. The rest are around 2.5 million barrels or less. The problem for the ultramajors is that they are so big that they need to put off more or bigger projects every year to make a difference in production.  "The scale of Exxon and Shell has reached a point that it is creating its own problems," said Tom Ellacott, vice president of corporate analysis at oil consultants Wood Mackenzie Ltd. “You need much bigger projects to move the needle.”

The challenge for both ultramajors is how to continue growing if oil prices remain low. Both companies so far appear prepared to double down on their strategy of being the largest players, ignoring calls from some investors to focus on smaller and faster projects.