Lombard Odier comment on Shell takeover: “Big Oil growth strategy is bust”
Pascal Menges, manager of the Lombard Odier Global Energy Fund comments on Royal Dutch Shell’s offer for BG Group Plc.
This shows that Big Oil’s growth strategy over the last ten years is bust. Having bet enormous sums on eye-wateringly expensive oil production from oil sands, ultra-deep water and arctic fields the supermajors are now ill-placed to cope with a low oil price.
What next? Shell’s purchase of BG Group heralds a scrabble by big oil to ‘high grade’ – improve the overall quality – of their portfolios. It didn’t have to be this way. Low oil prices in the early 2000s offered a window to pick up quality reserves and production at depressed prices. Instead they sat on their hands and waited until later in the decade to embark on pricey investments in new oil sources.
With BG Group, Shell gets exposure to Brazil’s vast Santos Basin reserves, and further involvement in the integrated gas (LNG) market. But it comes at a hefty price. Management will have their work cut out to execute the deal and generate synergies and assets sales. The risk of indigestion is not small.
Will other oil majors take the same route? They’d certainly like to ‘high grade’ their portfolios. Only Exxon has the flexibility to do big ticket deals like BG Group. In contrast Total, ENI and Statoil will have to content themselves with the pick ‘n mix counter.”