Oil fields are supposed to deteriorate as they get old, and oil companies are supposed to head for cover and yell for help when prices tumble. Both notions have generally held up over the past year, and the exception that proves the rule is Shell Oil.
Almost alone among the major oil companies, Shell--the Houston-based giant now completely owned by the Royal Dutch Shell Group of London and Amsterdam--has maintained a vigorous exploration and drilling program in the face of the price collapse.
Shell's performance is especially noteworthy because it has been romping through Uncle Sam's overworked Oil Patch, especially California, where decades of intensive drilling have made a pin cushion of the landscape and where the onshore prospects draw barely a mention in the debate over the nation's energy security.
While the industry's retreat from exploration last year caused California's first production decline since 1978, Shell boosted its overall crude oil output by buying more oil fields and stepping up its exploitation of Kern County's reservoirs of heavy oil, which have been producing for at least three-quarters of a century.
Pumping steam underground to coax the oil to the surface, it has turned one dogeared field near Bakersfield into the most prolific in the 48 contiguous states, surpassing even the fabled East Texas field.
Shell's diligence on its home turf enabled it to leapfrog Exxon to become the leading driller of oil and gas wells in the United States last year as well as the nation's leading wildcat driller in unproven fields, according to Petroleum Information Corp. of Denver. In domestic oil and gas reserves, Shell surpassed Atlantic Richfield to become No. 2 behind Exxon.
Of course, if oil prices decline over the long haul, Shell might look silly. But hardly anyone expects that. Shell's performance last year is only the latest bit of evidence cited by some analysts and others to suggest that Shell might be the smartest of the big oil companies. In any case, it has taken a different road from others with comparable resources, notably Exxon.
"Shell tends to take a long-term view of the business. The worse it looks, the more they want to go ahead," says Paul D. Mlotok of the Salomon Bros. investment firm in New York. "It's a deeply ingrained corporate philosophy. Exxon has the resources, too, but they have chosen to pull back. Exxon really is more pessimistic."
Who's right? British Petroleum in effect bet with Shell last week when it announced that it will spend $7.4 billion to buy the rest of Cleveland-based Standard Oil. Mlotok agrees: "I've got oil prices at $24 (per barrel) by 1990. I agree with Shell. They will move up in their relative standing in the business when all is said and done."
Shell and its parent have long been held in high regard by the investment community. The two have been affiliated for 75 years, and Royal Dutch Shell in 1985 acquired the 30% of Shell Oil it did not already own.
By most accounts, the management of the U.S.-based firm--led since 1976 by a thoughtful, independent-minded geologist from Louisiana named John F. Bookout--has been largely given a free rein. But industry observers often paint the two with the same rosy brush: as lean, forward-looking corporations that have tended to resist the lure of short-term profits in favor of holding to long-term strategies.
No Common Strategy
"The culture of Shell Oil management unquestionably over the past 75 years would have to be influenced by Royal Dutch Shell," Bookout says. "It stands to reason. . . . But despite what the analysts might say, our strategies are not coordinated. There's not a common strategy. The companies don't even face the same kind of problems."
Shell has hardly escaped damage during the past year: Earnings plummeted by nearly half, to $883 million. In its annual report made public last week, Shell confessed that again this year it probably won't achieve its usual annual target of a 5% increase in real net income and a 15% return on equity.
(A fully consolidated subsidiary of Royal Dutch/Shell Group, Shell Oil says it continues to report earnings because it has public debt-holders and there is interest in the financial community.)
Unlike such firms as Unocal, Chevron and Phillips, the company has made it through most of the 1980s without the financial burden--or even the serious specter--of a costly takeover battle.
But a more fundamental reason that Shell Oil looks so smart today is that it decided in 1978, during a pause in the great 1970s run-up in prices, not to use the gusher of oil revenue to diversify but instead to tend to its knitting. The company gradually rationalized its oil and gas properties by buying some and selling others, stepped up exploration, trimmed its total work force, closed half its service stations and nearly tripled sales at the ones it kept.
These are the type of steps that the rest of Big Oil was forced to take on an emergency basis last year when prices tumbled by more than half--and Shell was there to exploit the suddenly lower cost of buying leases, hiring drilling rigs and finding oil.
Boosted Its Reserves
"Shell has always been very efficiency-conscious. They didn't have the fat to cut that some others did," analyst Mlotok says.
One result: Its drilling and exploration activities last year, as well as a major buy of California reserves from Phillips Petroleum, enabled Shell to replenish 120% of the oil and gas it produced. What's more, it paid just $3.59 a barrel for those new reserves, according to analyst Tom Tracey of John S. Herold Inc., investment publishers in Greenwich, Conn.
"They're buying at half the cost of a year earlier," Tracey says. "Drilling costs are as low as they've been for a long time."
This sort of performance didn't just begin last year. Since 1982, Shell has sold oil fields containing about 165 million barrels of oil for $5.65 per barrel while buying fields with 600 million barrels for $3.61 a barrel. That sounds like a good enough bargain, but by an oilman's math it's even better: The transactions netted Shell about 440 million barrels of oil for less than $3 a barrel.
"That's a pretty good piece of business," says Bookout, a boast for him.
Of course, buying proven reserves still in the ground isn't that difficult for those with money, nor does it add anything to the nation's dwindling oil reserves. But Shell, alone among the major companies, says it has roughly replaced its U.S. oil reserves since 1978 through exploration and development alone. Its acquisitions have been gravy.
Gravy isn't a bad synonym for Shell's oil in California, notably the molasses-like stuff it bought with its eye-opening 1979 purchase of an old family-owned California company called Belridge Oil for $3.65 billion. At the time, it was the most expensive corporate buyout in U.S. history.
As with most of the oil that is left under California's topsoil after more than 80 years of drilling, Shell's is thick, heavy and difficult to bring to the surface. And it might fetch several dollars per barrel less than other grades of oil because it requires extra refining.
The Belridge properties in Kern County were producing about 40,000 barrels of oil a day when Shell outbid Texaco, Mobil and others for the little-known company. Bookout recalls that its whopping bid assumed that Shell's steam-injection techniques, which it has been practicing in California since 1962, could eventually raise the field's production to 100,000 barrels a day.
Last week, the Belridge holdings were producing 127,000 barrels daily, up more than 20% in a year's time. By contrast, the other major producers of heavy oil in the region, Chevron and Texaco, shut down wells and reined in expansion plans as part of a general retrenchment brought on by the collapse of prices.
The South Belridge field, controlled by Shell, rose to the top of the class by producing 60 million barrels of crude last year, trailing only two huge Alaska oil reservoirs among active U.S. fields. By comparison, the huge East Texas field had declined to 46 million barrels.
"That's the production story of the decade," says Bill Rintoul, a Bakersfield-based oil historian and journalist. "If Shell pulled in its horns, we'd really be in trouble up here."
The Belridge story sets Shell apart not only in the way it responds to low prices, but in the extent of its strategic reliance on squeezing more oil out of old fields. About one-third of Shell's oil is now produced by injecting steam underground, a share that the company eventually expects to exceed 50%.
Shell claims to lead the industry in this specialized corner of the business, whose potential is unknowable but impressive to think about.
Use New Technologies
The nation's recoverable oil reserves are currently estimated at about 28 billion barrels, which would run out in nine years at today's rate of production. But more than 10 times that much--300 billion barrels--remain in the earth as the dregs of past production. There is nothing wrong with the oil except that it needs help getting out.
A small industry has grown up around the enhanced-recovery process, which is centered in California where the heavy oil is, and numerous promising technologies--transmitting everything from micro-organisms to electrical current into the rocks containing the oil--have been applied.
Shell, and more recently Chevron and Texaco, through its acquisition of Getty Oil, is betting on heavy California oil as an increasingly important source of "new" reserves. But because of Shell's ability and inclination to expand last year, it could capitalize on sharply lower production costs--notably the less expensive oil used to produce the steam that is injected through pipes underground--to boost its Kern County output by more than 10% while Texaco, for example, has slashed its daily output of heavy California oil by about one-fourth.
Bookout says enhanced-recovery technology has already improved to the point where Shell, by the mid-1990s, will be able to boost production from its existing fields by nearly one-third.
He points out that if just 10% of the nation's old reserves of oil could be lured to the surface, the nation's known recoverable reserves would be doubled. Short of a fee on imported oil, which he generally opposes, Bookout urges tax relief and other measures to reward such activity.
"I hope that in this national debate we don't overlook the potential of our existing fields," Bookout says. "I know some people will say that's self-serving because we have a fairly good stake in it. But we're going forward anyway."
OIL: SEARCHING AND RETREATING
Rankings by domestic oil and gas wells drilled and completed.
1985 Company / Wells 1. Exxon / 1,073
2. Texas Oil & Gas / 951
3. Shell / 918
4. Amoco / 917
5. Texaco / 786
1986 Company / Wells 1. Shell / 1,052
2. Exxon / 558
3. Amoco / 545
4. Mobil / 527
5. Sun / 420
Rankings by number of domestic wildcat wells
1985 Company / Wells 1. Exxon / 130
2. Amoco / 93
3. Diamond Shamrock / 78
4. Arco / 71
5. Sun / 64
6. Shell / 63
1986 Company / Wells 1. Shell / 61
2. Exxon / 52
3. Mobil / 43
4. Hogan Drilling / 41
5. Sun / 39
6. Donald Slawson / 35
Source: Petroleum Information Corp.