Oil drilling failure rate surges at the Western majors

03/09/2010 12:35 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It’s not a factor now in the climbing price of oil but the trend certainly doesn’t portend cheaper oil down the road. Or a rosy future for the Western oil giants.

In 2009 Chevron’s (CVX) drilling failure rate climbed to 35%. More than one-third of exploratory wells came up dry. That compares to a 10% failure rate in 2008.

And that’s by no means an isolated increase in the drilling failure rate. ConocoPhillips (COP) saw its failure rate climb to 43% in 2009 from 32% in 2008.

Higher failure rates mean that it gets more and more expensive to find new oil to replace what’s been pumped out of the ground. Chevron’s target is a modest 1% increase in oil and gas production this year. ConocoPhillips is forecasting a 2.7% drop in production in 2010.

The reasons for the climbing failure rate are pretty simple.

The countries that sit on the world’s most promising areas for new exploration are keeping more and more of that geology for national oil companies. That limits Western oil majors to a few countries with promising geology and a lot of marginal and already explored regions. For example, in 2009 Chevron drilled almost half of its dry holes in the United States.

The response by the Western oil majors has been to buy instead of explore and to go for the gas.

Western integrated oil companies announced almost $100 billion in acquisitions in the last 12 months, according to Bloomberg. That’s a 53% increase for the previous 12 months.

Many of these deals, such as ExxonMobil’s (XOM) $29 acquisition of XTO Energy (XTO), have focused on natural gas from unconventional geologies such as the Barnett Shale formation in Texas.

That shift will have an effect on revenue and earnings at Western majors if oil prices keep headed higher while natural gas prices stay in their current slump. Increasingly what we think of as the oil industry—the Western majors such as ExxonMobil, Chevron, BP (BP), Royal Dutch Shell (RDS), ConocoPhillips, etc.—doesn’t look like the best way to invest in increasing demand and higher prices for oil.

The few state-owned oil companies that allow individual investors to buy shares—Petrobras (PBR) and Jubak’s Picks Statoil (STO)—look like a better alternative in the long run.

Full disclosure: I own Statoil in my personal portfolio.

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