“Never!” say the petroleum purists. Or rather, "Never again!" Mining for oil companies in the 1970s and 80s was a complete disaster.
We all tried it, they say, and we were useless, eventually being forced to sell at bargain basement prices to specialist miners.
But that was then and now is now – and right now there are a growing number of petroleum producers who are not doing enough to stay in business much more than a decade or so. Repsol and Chevron are two names that spring to mind because of their particularly poor reserve replacement ratios.
Choices will have to be made. Either the company in question adopts a maximise profit and shareholder return approach, which means milking the oil market for everything possible and returning the spare cash to the owners – and then disappearing or management finds something else to do with the loot, such as spending ever more on an increasingly difficult search for major oil fields, or invests in some other pursuit.
If Slugcatcher’s suggested choices look equally grim – they are, because quite simply, big oil has not done enough (or been lucky, or smart enough) to find the reserves which will keep it in business.
And at the end of the day, an oil company is a business which has a duty to grow, or fold – returning the capital to its owners who might choose to do something else with it.
So if folding is not an option that pleases management because it involves admitting that it has failed, and it also means selling yourself out of a very comfortable job, then option 2 comes into play, and that means finding something close to petroleum production – and that could mean mining.
As Slugcatcher sniffed the winds of change blowing through the oil patch courtesy of repeated RRR failures, he was reminded of what happened in the 80s during the last great mining asset sell-off.
A man who made his name back then was Tom Albanese, chief executive-in-waiting at Rio Tinto, the world’s second-biggest miner.
When a junior manager at a US mining company called Nerco, Albanese played a lead role in buying the discarded mining assets of Occidental, Superior, Nafco and TexasGulf.
Those deals were the making of his career because eventually Rio Tinto bought Nerco and Albanese rose to the top, taking the reins at Rio on May 1.
It is possible, just possible, that the new man at Rio will be looking back on those days of working with a series of oil companies and learning a lot – particularly the point that oil generates enormous cash flow, that oil companies are always looking for growth options, and that oil companies know how to deal.
Rio, on the other hand, needs a growth plan itself, or risks being run down by the new boys on the mining block, such as Xstrata and CVRD.
So here comes the deal – of the Slugcatcher variety.
Imagine big oil hunting around for a growth option – just as Tom Albanese is doing the same thing.
What, asks Slugcatcher, have they in common – and the answer is energy production in the form of coal and uranium.
If big oil cannot grow in oil, then perhaps it will be tempting (again) to grow in other forms of energy – with companies like Rio Tinto representing potentially excellent joint venture partners.
Would that be history repeating itself?
Yes.
But that’s what history does.
