Despite Profits, a Crisis for Big Oil Energy-Rich Countries Are Asserting Their Control Over Supplies

By Jad Mouawad

Oil production has begun falling at all of the major Western oil companies, and they are finding it harder than ever to find new prospects even though they are awash in profits and eager to expand.

Part of the reason is political. From the Caspian Sea to South America, Western oil companies are being squeezed out of resource- rich provinces. They are being pressed to renegotiate contracts on less-favorable terms and are fighting losing battles with assertive state-owned oil companies.

And much of their production is in mature regions that are declining, like the North Sea and Alaska.

The reality, experts say, is that the oil giants that once dominated the global market have lost much of their influence – and with it, their ability to increase supplies.

“This is an industry in crisis,” said Amy Myers Jaffe, the associate director of Rice University’s energy program in Houston. “It’s a crisis of leadership, a crisis of strategy and a crisis of what the future looks like for the supermajors,” a term often applied to the biggest oil companies.

“They are like a deer caught in headlights. They know they have to move, but they can’t decide where to go.”

The sharp retreat in commodity prices over the last month, about 20 percent, reflects slowing global growth and with it reduced demand for more oil in the short term.

But over the next decade, the world will need more oil to satisfy developing Asian economies like China. The oil companies’ difficulties suggest that these much-needed future supplies may be hard to come by.

Oil production has failed to catch up with rising consumption in recent years, a disparity that propelled oil prices to records this year. Despite the recent decline, oil remains above $100 a barrel, unimaginable a few years ago, causing pain throughout the economy, from consumers reeling at the gasoline station to airlines and automakers posting sizable losses.

The scope of the supply problem became more clear in the latest quarter, when the five biggest publicly traded oil companies, including Exxon Mobil, said their oil output had declined by a total of 614,000 barrels a day, even as they posted $44 billion in profits. It was the steepest of five consecutive quarters of declines.

While that drop might not sound like much in a world that consumes 86 million barrels of oil each day, today’s markets are so tight that the slightest shortfalls can push up prices.

Along with mature fields, the companies have contracts with producing countries whose governments allocate fewer barrels to oil companies as prices rise.

“It has become really, really difficult to grow production,” said Paul Horsnell, an analyst at Barclays Capital. “International companies have a portfolio of assets in areas of significant decline and no frontier discoveries to make up for that.”

As a result of the industry’s troubles, energy experts do not expect oil supplies to grow this year in countries outside the Organization of Petroleum Exporting Countries. Global demand for oil is expected to expand by 800,000 barrels a day, mostly because of rising demand in China and the Middle East, despite lower consumption in developing countries.

This imbalance between supplies and demand will be one thing that OPEC ministers will consider when they meet next month to decide whether or not to increase their production. OPEC, as a whole, has about two million barrels a day in untapped capacity that its members control.

The new oil order has been emerging for a few decades.

As late as the 1970s, Western corporations controlled significantly more than half of the world’s oil production. These companies – Exxon Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips, Total of France and Eni of Italy – now produce just 13 percent.

The 10 largest holders of petroleum reserves today are state- owned companies, like Gazprom of Russia and Iran’s national oil company.

Sluggish supplies have prompted a cottage industry of doomsday predictions that the world’s oil production has reached a peak. But many energy experts say these “peak oil” theories are misplaced.

They say that the world is not running out of oil, but rather that the companies that know the most about how to produce oil are running out of places to drill.

“There is still a lot of oil to develop out there, which is why we don’t call this geological peak oil, especially in places like Venezuela, Russia, Iran and Iraq,” said Arjun Murti, an energy analyst at Goldman Sachs. “What we have now is geopolitical peak oil.”

Western companies are far better than most national oil companies at finding and extracting petroleum, experts say. They have developed advanced exploration technologies and can muster significant financing to develop new fields. Many of the world’s exporting states, however, have spurned their expertise.

Oil company executives see a straightforward explanation: a trend known as resource nationalism. They contend that they have been shut out of promising regions by a rising assertiveness in the Middle East, in Russia, in South America and elsewhere by governments determined to keep full control of their oil.

Even in places where they are allowed to operate, the Western oil companies face growing problems. Countries like Russia, Algeria, Nigeria and Angola have recently sought to renegotiate their contracts with foreign investors to capture a bigger share of the profits.

“The problem with the supply side of the equation is a problem of accessing the resources in the ground so they can be explored and developed,” Rex Tillerson, the chairman of Exxon, said during a recent interview. “That’s a political question where governments have made choices.”

This sense of being hemmed in helps explain why the Western oil companies want more offshore drilling in the United States. They see it as one of their few options.

These companies have also tried to diversify. They have turned to natural gas as a profitable source of growth. They are tackling hydrocarbon resources, like deep-water reserves, heavy oil or tar sands. And some companies, like Shell and BP, are investing in renewable fuels.

Unquestionably, the oil companies could have done more. They failed to invest heavily in exploration and production after the oil- price collapse of the mid-1980s, which lasted through the 1990s.

Originally published by The New York Times Media Group.

(c) 2008 International Herald Tribune. Provided by ProQuest LLC. All rights Reserved.