[R-G] As Oil Giants Lose Influence, Supply Drops

[Yoshie Furuhashi]

The main global energy conflict today is that those who control the
largest reserves -- national oil companies -- tend to lack the best
technology and those who control the best technology -- the biggest
international oil companies -- cannot get access to the largest
reserves on the terms they like.

The power elites of the North want to solve their oil supply problem
in this way: on the supply side, get the NOCs of the South to make
their reserves available to the IOCs of the North on more profitable
terms; on the demand side, get the states of the South -- especially
industrializing Asian states and oil-exporting MENA and Latin American
states -- to stop subsidizing domestic energy consumption.  In the
case of the US power elite, they may go so far as to resort to "regime
change" -- through war, coups d'état, "democracy assistance" -- to try
to change the terms on the supply side, but as is shown in Iraq, you
can't raise oil production by destroying an oil state, and the case of
Venezuela proves that a coup fails to topple a popular leader who
enjoys wide support in the military he commands.  "Democracy
assistance," too, can backfire, diminishing rather than improving
energy security: Georgia, an important energy transit state, is the
most obvious case in point.

The power elites of the South (especially the net oil importers), for
their own reasons (chiefly to cut state expenditures), would like to
curtail energy subsidies and have already begun to do so to a certain
extent, but cutting them is so politically explosive that they find it
difficult to do so quickly.  Also for their own ideological reasons,
the neoliberal factions of the power elites of the South would like to
privatize their own NOCs more, but most people of the South are
against privatization and so are resource-nationalist political
leaders backed by them, and even many of the power elites of the South
who are otherwise committed to the principles of neoliberal capitalism
and would like to benefit from more privatization are not willing to
bring back the international energy order that existed before
nationalization.

Leftists, many of whom are now environmentalists, have trouble coming
up with a coherent approach to this conflict.  If the living standards
of peoples of the South are to rise, their nations must modernize
their means of production and social reproduction, and their per
capita energy consumption must rise, only a part of which can by
supplied with greener, renewable energy sources.  -- Yoshie

<http://www.nytimes.com/imagepages/2008/08/19/business/20080819_OIL_GRAPHIC.html>
Big Profits, Bigger Troubles
For the top five oil companies -- Exxon, Shell, Chevron, BP,
ConocoPhillips -- oil production has remained stagnant over the last
five years, while profits have soared.
Compared with 1994, the top five companies are spending a much smaller
proportion of their cash on exploration, instead committing large sums
to share buybacks.

<http://www.nytimes.com/2008/08/19/business/19oil.html>
August 19, 2008
As Oil Giants Lose Influence, Supply Drops
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 forced 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.

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 all of the commodities' 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 surging 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,
like higher prices at the gas pump 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 the 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 has about 2 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 well over 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.

Today's 10 largest holders of petroleum reserves are state-owned
companies, like Russia's Gazprom 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 the world is not running out of oil — rather, 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 W. Tillerson, the chairman of Exxon, said in 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 after the oil-price collapse of the
mid-1980s, which lasted through the 1990s.

In 1994, the top five oil companies spent 3 percent of their free cash
on share buybacks and 15 percent on exploration. By 2007, they were
spending 34 percent of their free cash on buybacks — in effect,
propping up their share prices — and a mere 6 percent on exploration,
according to figures compiled by a team led by Ms. Jaffe and Ronald
Soligo of Rice University. As a result, some experts warn that
supplies will fall short of the demand over the next decade, perhaps
sending prices well above today's levels.

At a recent conference in Madrid, Christophe de Margerie, the chief
executive of the French company Total, said the world would be
hard-pressed to raise supplies beyond 95 million barrels a day by
2020. Only a few years ago, forecasters expected 120 million barrels a
day by 2030, a level many analysts now view as unrealistic.

The major companies picked up their capital spending around 2005,
although much of the increase has been offset by the soaring cost of
development. Exxon, for example, expects to spend about $25 billion
annually for the next three years to expand its business, compared
with $15 billion a year from 2002 through 2006.

"It's amazing the difference from the 1970s, where a lot of money went
into exploration, development and production of new resources," said
Paul Stevens, a senior research fellow at Chatham House, a London
policy research organization. "It is happening a little bit now, but
it is not going to be enough."

As the power and clout of Western companies erode, the world may
become increasingly dependent on government-controlled entities for
oil.

While some may be up to the task, like Saudi Aramco, others, like
Petróleos de Venezuela, suffer from bureaucratic inefficiencies and
political interference.

"We are going to depend on the Venezuelan, the Nigerian or the Iranian
oil companies for the future of our oil supplies," said Bruce Bullock,
the director of the energy institute at Southern Methodist University.
"This is a troubling trend."