Tompkins County Relocalization Project

[Tompkins County Relocalization Project <tcrp-news AT lists.ibiblio.org>]

More mainstream recognition of the view that we're approaching a
peak even if geological limits have nothing to do with it.

Jon

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The New York Times
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."