SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMC NEWS

TMCNET eNEWSLETTER SIGNUP

Are Big Oil's tanks running dry?
[February 07, 2006]

Are Big Oil's tanks running dry?


(Economist.com Via Thomson Dialog NewsEdge)The world's big private oil companies are reporting record profits on the back of high oil prices. They should enjoy it while it lasts, for they are struggling to find new reserves to replace the stuff they are pumping



OIL companies are little loved at the best of times. But woe betide those firms that announce record profits. They can expect to be showered with vilification, spewed from the mouths of politicians, media and the public like black gold from a freshly-struck gusher. Such was the reaction on Monday January 30th to the news that Exxon Mobil, the world's biggest privately owned oil and gas company, had enjoyed the largest net profit of any American company ever in 2005an eye-watering $36 billion. A couple of days later, Royal Dutch Shell reported annual net profit of 13 billion ($23 billion), a record for a listed British company. The week before, America's ConocoPhillips and Chevron reported big jumps in earnings too. And on Tuesday February 7th, Britain's BP also reported bumper profits, 11 billion for the year, though analysts had expected even more. The firm pledged to return up to $65 billion to shareholders over the next few years if the oil price stays high.

The happy news for Exxon's shareholders was greeted in Washington, DC, with furious calls from both Democrats and Republicans for a windfall tax on the perfidious oil industry, for many years the customary reaction to news of that sort. Exxon's announcement of record third-quarter profits in October had prompted Congress to ask representatives of Big Oil to answer charges of profiteering. In Britain, Shell faced similar ire. Consumer groups wailed and trade-union leaders called for one-off taxes to pay for assistance to pensioners.


President George Bush used his state-of-the-union address this week to admonish Americans for their addiction to oil. But he was moved to defend Exxon. He pointed out that the bumper earnings were a result of its operating in the marketplace: high oil profits are a direct consequence of high oil prices. Booming demand, particularly from India and China, has driven the cost of a barrel up from around $10-15 in 1998 to nearly $70 today. With so much of the world's oil coming from state-owned producers in the Middle East, the big private oil companies of America and Europe have little control over prices.

Even the Organisation of the Petroleum Exporting Countries (OPEC), which this week decided to leave its production quotas unchanged, can do little to alter prices. The oil cartel is currently pumping some 30m barrels a day, its highest output for 25 years. It could not produce much more, even if it wanted to. Meanwhile, oil consumption increased in 2005 and is set to rise again in 2006, according to the International Energy Agency. It seems that high oil prices, and the consequent breathtaking profits for Big Oil, are not about to melt away.

When the wells run dryThe big oil companies are probably less worried about riding out public opinion than they are about operational challenges that threaten their future. Executives may be popping champagne corks now, but the oil wells that generate the big bucks are drying up. Behind the headline figures, less enticing numbers lurk. Shell's profits came despite a decline in its oil production compared with the year before; Exxon also suffered a small decline (see chart). And Shell replaced only 70-80% of the oil it pumped with new reserves. In 2004 the replacement rate was even lowerunder 50%and the firm suffered a scandal over the misreporting of its reserves. BP replaced a healthier 95% in 2005 according to a formula set by America's Securities and Exchange Commission. Exxon replaced 83% by the same measure (or 112%, according to its own less conservative calculations).

Replacing reserves is one of the most pressing problems facing the world's leading oil firms. Production from fields that the big western companies have relied on since the 1970sin the North Sea, the Gulf of Mexico and Alaskais in decline. As a result, the companies have had to search further afield. Most of the world's oil is located around the Persian Gulf, but this is the preserve of giant state-run producers. Western oil firms are largely excluded from exploration and development there.

They have instead explored West Africa, the Caspian and other out-of-the-way places. This has proved trickier than exploiting reserves close to home. Shell has had to contend with campaigns by human-rights activists over its involvement in Nigeria. It is denounced for having too cosy a relationship with a government accused of repressing political opposition in oil-producing regions. And its output has been hit by the kidnap of oil workers and by pipeline explosions blamed on local groups who feel they have not benefited from the oil wealth. Furthermore, extracting oil in far-flung places, such as that sitting under the deep waters off Brazil, requires costly technology and capital expense.

Russia, which sits on 5% of the world's estimated oil reserves, was once touted as a place where the big oil firms could do business. But President Vladimir Putin's ugly dismemberment of Yukos, a home-grown oil firm run by a political opponent, led to a cooling of relations with western oil companies, which are now all but shut out of the country. Mr Putin has overseen consolidation of the country's oil and gas firms as he tries to build a national champion out of Gazprom.

The big oil firms are also suffering from increasing competition for assets in other regions. Chinese and Indian oil firms are snapping up smaller rivals around the world to satisfy their economies' seemingly ever-growing demand for energy. This has led to a political backlash in some western countries. Last year CNOOC, a Chinese state-controlled oil firm, lost out to Chevron in the battle to buy Unocal, a mid-sized American producer, thanks to strong opposition in America's Congress.

The state-backed oil firms of India and China stand accused of paying over the odds for assets in their quest to boost their share of global reserves. Unlike Exxon, Shell and the like, they don't have to answer to inquisitive shareholders. In January, India and China agreed to make joint offers for some energy assets to avoid pushing up prices too far by bidding against each other. Their national oil companies are also more inclined to deal with regimes that western firms may shun. India has made deals with Myanmar and Iran, for example.

The western oil firms do still have some advantages over the competition. The technological advances forced upon them as they seek out oil in difficult places may help with the exploitation of unconventional hydrocarbons, such as Canada's tar sands. And they also have the capital and know-how needed to extract and transport natural gas in liquefied form. But if the big western firms lose the battle to replace reserves, the era of mega-profits will come to end however high the price of oil climbs.

[ Back To TMCnet.com's Homepage ]









Technology Marketing Corporation

35 Nutmeg Drive Suite 340, Trumbull, Connecticut 06611 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2019 Technology Marketing Corporation. All rights reserved | Privacy Policy