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The real reason behind big oil's cost-cutting obsession

COSST cutting is such a big issue for the world's oil companies that it seems to Slugcatcher that...

Or, to widen that thought somewhat, perhaps the world's oil companies are worried about the discovery of more than one new source of energy, which will crash the price.

The latest bogey-man to worry big oil is Iran, and the potential for it to be re-admitted as a trustworthy country without nuclear-weapon ambitions and a plan to blow Israel and other perceived enemies, such as Saudi Arabia and the US, off the face of the earth.

If that sounds somewhat exaggerated take the time to check out some of the threats made over the past few decades by the mad mullahs who run Iran and its once world-class oil and gas sector.

The return of Iran, which took a few tentative steps forward last week during inconclusive talks in Geneva, is an issue to match the discovery of technologies to squeeze gas and oil out of tightly-packed rock, the so-called shale-gas phenomena.

Mainly confined to North America, at this stage, the oil-from-shale technologies will spread worldwide despite the doubts sometime raised about the geology of Texas, Dakota and other US states being in some way unique.

There is nothing special about North American geology, though there is something special about the pipeline system, the refining capacity and the energy hungry market with capacity to pay.

In time, shale technology will go global and the oil majors not only know that for a fact, they are the leaders of the shale rush.

If shale technology was the only driving force behind what appears to be an emerging glut of oil and gas then the problem might be more manageable.

Unfortunately the issue is more complex than that with other factors layering pressure on the oil price. These include the steady rise of alternative and renewable energy sources, the global economic slowdown, which has dimmed demand, and, lately, the prospect of Iran making a return as a major oil supplier.

It is uncertain how long it will take for Iran to make a full return. However, the country does have the potential to double its 2.6 million barrels of oil a day, and also has the potential to become a major exporter of gas thanks to reserves classified as the world's biggest.

Iran + shale gas + alternative energy sources are part of the pressure piling up on the world's oil industry, which has been watching with concern as the oil price has struggled to rise significantly over the past few years and, more recently, been in a worrying downtrend.

The lower-than-expected oil price, especially for believers in Peak Oil theory, is hurting countries as much as companies with Russia nervous about the future of its biggest export item, and Venezuela on the verge of economic collapse.

Hard-nosed managers at big oil companies can sense the fundamental change sweeping across the oil patch, and seem to have decided that the days of oil trading at more than $US100 a barrel might soon be a memory, whether measured as Brent or West Texas equivalent quality.

So, if the price of a commodity is not rising, and does not even look like rising thanks to abundant supply and the potential for expanding supply, there is only one course of action left: cost cutting.

Australia's oil and gas sector has been a victim of the costs-out drive with projects such as the onshore Browse LNG replaced by a cheaper floating LNG option, and plans to expand the Gorgon LNG project wrapped in mothballs until the true cost of the first stage are better understood and Australia's internal costs decline.

Investors have welcomed the new-found focus on costs because they believe it will add to profits and let oil companies pay increased dividends or undertake expanded share buy-back programs.

Increased investment returns might be a result of lower costs but The Slug suspects the real issue is that the big oil companies have looked at the future price of their primary products and come to the conclusion that rising competition from new sources of energy is deadening the outlook and the only way to maintain profits in an over-supplied market is to cut costs.

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A growing series of reports, each focused on a key discussion point for the energy sector, brought to you by the Energy News Bulletin Intelligence team.

A growing series of reports, each focused on a key discussion point for the energy sector, brought to you by the Energy News Bulletin Intelligence team.

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