Are Big Oil�s tanks running dry? ( Economist Article)
energyresources : Message: Are Big Oil�s tanks running dry? ( Economist Article): "Feb 7, 2006
From The Economist Global Agenda
Feb 7, 2006 From The Economist Global AgendaAre Big Oil’s tanks running dry?The world’s big private oil companies arereporting record profits on the back of high oilprices. They should enjoy it while it lasts, forthey are struggling to find new reserves to replace the stuff they are pumpingOIL companies are little loved at the best oftimes. But woe betide those firms that announcerecord profits. They can expect to be showeredwith vilification, spewed from the mouths ofpoliticians, media and the public like black goldfrom a freshly-struck gusher. Such was thereaction on Monday January 30th to the news thatExxon Mobil, the world’s biggest privately ownedoil and gas company, had enjoyed the largest netprofit of any American company ever in 2005aneye-watering $36 billion. A couple of days later,Royal Dutch Shell reported annual net profit of£13 billion ($23 billion), a record for a listedBritish company. The week before, America’sConocoPhillips and Chevron reported big jumps inearnings too. And on Tuesday February 7th,Britain's BP also reported bumper profits, £11billion for the year, though analysts hadexpected even more. The firm pledged to return upto $65 billion to shareholders over the next fewyears if the oil price stays high.The happy news for Exxon’s shareholders wasgreeted in Washington, DC, with furious callsfrom both Democrats and Republicans for awindfall tax on the perfidious oil industry, formany years the customary reaction to news of thatsort. Exxon’s announcement of recordthird-quarter profits in October had promptedCongress to ask representatives of “Big Oil” toanswer charges of profiteering. In Britain, Shellfaced similar ire. Consumer groups wailed andtrade-union leaders called for one-off taxes topay for assistance to pensioners.President George Bush used his state-of-the-unionaddress this week to admonish Americans for their“addiction” to oil. But he was moved to defendExxon. He pointed out that the bumper earningswere a result of its operating in themarketplace: high oil profits are a directconsequence of high oil prices. Booming demand,particularly from India and China, has driven thecost of a barrel up from around $10-15 in 1998 tonearly $70 today. With so much of the world’s oilcoming from state-owned producers in the MiddleEast, the big private oil companies of Americaand Europe have little control over prices.Even the Organisation of the Petroleum ExportingCountries (OPEC), which this week decided toleave its production quotas unchanged, can dolittle to alter prices. The oil cartel iscurrently pumping some 30m barrels a day, itshighest output for 25 years. It could not producemuch more, even if it wanted to. Meanwhile, oilconsumption increased in 2005 and is set to riseagain in 2006, according to the InternationalEnergy Agency. It seems that high oil prices, andthe consequent breathtaking profits for Big Oil, are not about to melt away.When the wells run dryThe big oil companies are probably less worriedabout riding out public opinion than they areabout operational challenges that threaten theirfuture. Executives may be popping champagne corksnow, but the oil wells that generate the bigbucks are drying up. Behind the headline figures,less enticing numbers lurk. Shell’s profits camedespite a decline in its oil production comparedwith the year before; Exxon also suffered a smalldecline (see chart). And Shell replaced only70-80% of the oil it pumped with new reserves. In2004 the replacement rate was even lowerunder50%and the firm suffered a scandal over themisreporting of its reserves. BP replaced ahealthier 95% in 2005 according to a formula setby 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 pressingproblems facing the world’s leading oil firms.Production from fields that the big westerncompanies have relied on since the 1970sin theNorth Sea, the Gulf of Mexico and Alaskais indecline. As a result, the companies have had tosearch further afield. Most of the world’s oil islocated around the Persian Gulf, but this is thepreserve of giant state-run producers. Westernoil firms are largely excluded from exploration and development there.They have instead explored West Africa, theCaspian and other out-of-the-way places. This hasproved trickier than exploiting reserves close tohome. Shell has had to contend with campaigns byhuman-rights activists over its involvement inNigeria. It is denounced for having too cosy arelationship with a government accused ofrepressing political opposition in oil-producingregions. And its output has been hit by thekidnap of oil workers and by pipeline explosionsblamed on local groups who feel they have notbenefited from the oil wealth. Furthermore,extracting oil in far-flung places, such as thatsitting under the deep waters off Brazil,requires costly technology and capital expense.Russia, which sits on 5% of the world’s estimatedoil reserves, was once touted as a place wherethe big oil firms could do business. ButPresident Vladimir Putin’s ugly dismemberment ofYukos, a home-grown oil firm run by a politicalopponent, led to a cooling of relations withwestern oil companies, which are now all but shutout of the country. Mr Putin has overseenconsolidation of the country’s oil and gas firmsas he tries to build a national champion out of Gazprom.The big oil firms are also suffering fromincreasing competition for assets in otherregions. Chinese and Indian oil firms aresnapping up smaller rivals around the world tosatisfy their economies’ seemingly ever-growingdemand for energy. This has led to a politicalbacklash in some western countries. Last yearCNOOC, a Chinese state-controlled oil firm, lostout to Chevron in the battle to buy Unocal, amid-sized American producer, thanks to strong opposition in America’s Congress.The state-backed oil firms of India and Chinastand accused of paying over the odds for assetsin their quest to boost their share of globalreserves. Unlike Exxon, Shell and the like, theydon’t have to answer to inquisitive shareholders.In January, India and China agreed to make jointoffers for some energy assets to avoid pushing upprices too far by bidding against each other.Their national oil companies are also moreinclined to deal with regimes that western firmsmay shun. India has made deals with Myanmar and Iran, for example.The western oil firms do still have someadvantages over the competition. Thetechnological advances forced upon them as theyseek out oil in difficult places may help withthe exploitation of “unconventional”hydrocarbons, such as Canada’s tar sands. Andthey also have the capital and know-how needed toextract and transport natural gas in liquefiedform. But if the big western firms lose thebattle to replace reserves, the era ofmega-profits will come to end however high the price of oil climbs.http://tinyurl.com/9kpmr (requires subscription)Copyright © 2006 The Economist Newspaper and TheEconomist Group. All rights reserved
From The Economist Global Agenda
Feb 7, 2006 From The Economist Global AgendaAre Big Oil’s tanks running dry?The world’s big private oil companies arereporting record profits on the back of high oilprices. They should enjoy it while it lasts, forthey are struggling to find new reserves to replace the stuff they are pumpingOIL companies are little loved at the best oftimes. But woe betide those firms that announcerecord profits. They can expect to be showeredwith vilification, spewed from the mouths ofpoliticians, media and the public like black goldfrom a freshly-struck gusher. Such was thereaction on Monday January 30th to the news thatExxon Mobil, the world’s biggest privately ownedoil and gas company, had enjoyed the largest netprofit of any American company ever in 2005aneye-watering $36 billion. A couple of days later,Royal Dutch Shell reported annual net profit of£13 billion ($23 billion), a record for a listedBritish company. The week before, America’sConocoPhillips and Chevron reported big jumps inearnings too. And on Tuesday February 7th,Britain's BP also reported bumper profits, £11billion for the year, though analysts hadexpected even more. The firm pledged to return upto $65 billion to shareholders over the next fewyears if the oil price stays high.The happy news for Exxon’s shareholders wasgreeted in Washington, DC, with furious callsfrom both Democrats and Republicans for awindfall tax on the perfidious oil industry, formany years the customary reaction to news of thatsort. Exxon’s announcement of recordthird-quarter profits in October had promptedCongress to ask representatives of “Big Oil” toanswer charges of profiteering. In Britain, Shellfaced similar ire. Consumer groups wailed andtrade-union leaders called for one-off taxes topay for assistance to pensioners.President George Bush used his state-of-the-unionaddress this week to admonish Americans for their“addiction” to oil. But he was moved to defendExxon. He pointed out that the bumper earningswere a result of its operating in themarketplace: high oil profits are a directconsequence of high oil prices. Booming demand,particularly from India and China, has driven thecost of a barrel up from around $10-15 in 1998 tonearly $70 today. With so much of the world’s oilcoming from state-owned producers in the MiddleEast, the big private oil companies of Americaand Europe have little control over prices.Even the Organisation of the Petroleum ExportingCountries (OPEC), which this week decided toleave its production quotas unchanged, can dolittle to alter prices. The oil cartel iscurrently pumping some 30m barrels a day, itshighest output for 25 years. It could not producemuch more, even if it wanted to. Meanwhile, oilconsumption increased in 2005 and is set to riseagain in 2006, according to the InternationalEnergy Agency. It seems that high oil prices, andthe consequent breathtaking profits for Big Oil, are not about to melt away.When the wells run dryThe big oil companies are probably less worriedabout riding out public opinion than they areabout operational challenges that threaten theirfuture. Executives may be popping champagne corksnow, but the oil wells that generate the bigbucks are drying up. Behind the headline figures,less enticing numbers lurk. Shell’s profits camedespite a decline in its oil production comparedwith the year before; Exxon also suffered a smalldecline (see chart). And Shell replaced only70-80% of the oil it pumped with new reserves. In2004 the replacement rate was even lowerunder50%and the firm suffered a scandal over themisreporting of its reserves. BP replaced ahealthier 95% in 2005 according to a formula setby 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 pressingproblems facing the world’s leading oil firms.Production from fields that the big westerncompanies have relied on since the 1970sin theNorth Sea, the Gulf of Mexico and Alaskais indecline. As a result, the companies have had tosearch further afield. Most of the world’s oil islocated around the Persian Gulf, but this is thepreserve of giant state-run producers. Westernoil firms are largely excluded from exploration and development there.They have instead explored West Africa, theCaspian and other out-of-the-way places. This hasproved trickier than exploiting reserves close tohome. Shell has had to contend with campaigns byhuman-rights activists over its involvement inNigeria. It is denounced for having too cosy arelationship with a government accused ofrepressing political opposition in oil-producingregions. And its output has been hit by thekidnap of oil workers and by pipeline explosionsblamed on local groups who feel they have notbenefited from the oil wealth. Furthermore,extracting oil in far-flung places, such as thatsitting under the deep waters off Brazil,requires costly technology and capital expense.Russia, which sits on 5% of the world’s estimatedoil reserves, was once touted as a place wherethe big oil firms could do business. ButPresident Vladimir Putin’s ugly dismemberment ofYukos, a home-grown oil firm run by a politicalopponent, led to a cooling of relations withwestern oil companies, which are now all but shutout of the country. Mr Putin has overseenconsolidation of the country’s oil and gas firmsas he tries to build a national champion out of Gazprom.The big oil firms are also suffering fromincreasing competition for assets in otherregions. Chinese and Indian oil firms aresnapping up smaller rivals around the world tosatisfy their economies’ seemingly ever-growingdemand for energy. This has led to a politicalbacklash in some western countries. Last yearCNOOC, a Chinese state-controlled oil firm, lostout to Chevron in the battle to buy Unocal, amid-sized American producer, thanks to strong opposition in America’s Congress.The state-backed oil firms of India and Chinastand accused of paying over the odds for assetsin their quest to boost their share of globalreserves. Unlike Exxon, Shell and the like, theydon’t have to answer to inquisitive shareholders.In January, India and China agreed to make jointoffers for some energy assets to avoid pushing upprices too far by bidding against each other.Their national oil companies are also moreinclined to deal with regimes that western firmsmay shun. India has made deals with Myanmar and Iran, for example.The western oil firms do still have someadvantages over the competition. Thetechnological advances forced upon them as theyseek out oil in difficult places may help withthe exploitation of “unconventional”hydrocarbons, such as Canada’s tar sands. Andthey also have the capital and know-how needed toextract and transport natural gas in liquefiedform. But if the big western firms lose thebattle to replace reserves, the era ofmega-profits will come to end however high the price of oil climbs.http://tinyurl.com/9kpmr (requires subscription)Copyright © 2006 The Economist Newspaper and TheEconomist Group. All rights reserved
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