Safer betting on a horse

Recently I was asked to attend an investors’ forum put on by a major oil company on behalf of a friend who works for an investment fund. He asked me to go because he knew I had the inside track on the workings of the oil industry, and thought it might be fun. It was.

The representative of the oil company showed a slide of a collapsing Return on Capital Expenditure which was inversely proportional to the oil price, and put the blame squarely on outside influences such as political difficulties, delays to non-operated projects, and unreasonable suppliers. He then casually mentioned that the company would be switching from a strategy of meeting a certain annual production target – which been the cornerstone of its mid-term plans for the past 5 years – to one of profitability. He said it with an air of a waiter informing a set of diners that the house wine had changed. Naturally, there was no admission that the previous strategy was an utter failure, let alone a suggestion that company officers ought to be removed from their posts. The only explanation of the 90-degree change in direction was that the production target could not be met; the notion that perhaps profitability ought to have been considered beforehand seemed to pass them by. He finished the presentation by saying he was sure his company had the right people with the right mindset, the right attitude, and a complete understanding of the situation, and that there was nothing wrong with their work practices. All that needed to be done was fiddle with a few things here and there, introduce a new procedure or two, and “really make an effort” to control costs – the last one unintentionally implying that up to now nobody had made much effort at all, something I could well believe.

He marched off the stage to be followed by somebody who gave a presentation on a project in Iraq: a service contract which pays less than $2 per barrel in return for a capital expenditure of well over $10bn. At the time these Iraqi contracts were being signed it was pretty much admitted that the oil companies were accepting very low rates of return because they were allowed to book the reserves and the production, which were at the time considered to be more important to investors than profitability. In other words, the first presentation I saw detailing the company’s strategy was completely contradicted by the next one describing the company’s flagship project.

The first presentation was badly translated, contained several spelling mistakes, started 10 minutes late and overran its allotted time of half an hour by 15 minutes. I left before the end of the second one, and headed for the nearest bar.

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