Which way is ‘Big Oil’ headed?

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Heads of some of the biggest energy companies testified before a US Senate Committee on the subject of energy pricing and profits in 2005. (Chip Somodevilla/Getty Images)

Here is an apparent contradiction. After a couple of years of high oil prices, the world's leading private oil companies are raking in record profits. In 2006 the five top US and Western European companies reported an all-time record of US $120 billion in profits, equivalent in size to Ireland's gross domestic product.

The group includes one of the ‘Big 5' - Exxon - which reported the largest-ever corporate profits in US history, at US $39.5 billion. Word from Houston, the unofficial capital of ‘big oil', is that the city, tarnished by the spectacular bankruptcy of Enron a few years back, is booming again. Yet, at an oil industry conference in the very same city in March, James Mulva, chief executive of ConocoPhillips, stood up quite seriously to say that as far as he was concerned, these days, ‘big oil is not so big'.

What is going on? It seems that Mulva was not just indulging in false modesty, or an attempt to lower the industry's profile in the eyes of its critics. The conference he was speaking at, organised by Rice University, was focusing on the changing relationship between companies like his, publicly quoted commercial operators known in the jargon as international oil companies (IOCs) on the one hand, and the mainly state-owned oil producers known as national oil companies (NOCs) on the other.

"Energy consumers, particularly the American public, have failed to grasp the transformation taking place in the international energy scene," said Mulva. "Many consumers, elected officials and policymakers cling to the misconception that future energy supply is solely in the hands of the publicly-held Western oil companies, the so-called ‘big oil'. But in comparison to most NOCs, ‘big oil' is not so big."

Mulva was lining himself up with the view taken by a number of analysts who argue that while high oil prices have indeed generated massive windfall profits for the large oil companies, because of other fundamental changes, these companies are on the threshold of an impending resource squeeze. They claim that 2006 might, in fact, prove to be the last big fling before the onset of a definitely more austere future.

Analysts point out that the IOCs now directly control less than 10% of the world's proven oil reserves, compared to the 77% controlled by the NOCs. Fourteen of the world's top 20 oil producing companies are now state-controlled. The big five private sector groups have had a rather uneven record on building and replacing their proven reserves in recent years. Shell is still suffering the consequences of having to admit in 2004 that it had massively over-stated its reserves. In April the company announced a US $450 million dollar settlement with its shareholders to help compensate them for losses suffered as a result of that fiasco.

Chevron had a reasonably good year in 2006, replacing 101% of its reserves, but that came after replacing just 18% in 2004. For ConocoPhillips Mulva has admitted that reserve replacement will become ‘somewhat uneven' over the next few years as major projects take time to develop and resources become harder to access. Other big groups including Exxon and Chevron are also expected to see reserve shrinkage because of Venezuela's move to seize control of heavy oil deposits in the country. IOCs, so the theory goes, may be squeezed hard by a new wave of ‘resource nationalism'.

There is certainly evidence that national governments in oil exporting countries are nowadays much more interested in controlling reserves than they were in the past.

In the Venezuelan case, President Hugo Chávez has raised tax and royalty charges and was demanding that Western companies cede a 60% stake in heavy oil projects by 1 May.

"Venezuelan production, when you compare it to the rest of the operations of these companies, is significantly more profitable," notes Fadel Gheit, energy analyst at Oppenheimer & Co.

He estimates that ConocoPhillips was last year clearing a profit of up to US $22 on each barrel produced in Venezuela, about 50% higher than its per-barrel profit in the Gulf of Mexico. In early April Pietro Pitts, publisher of Latin Petroleum, commented that ‘Chavez is playing a game of chicken with the largest oil companies in the world, and for the moment he is winning'.

In Russia last year state-owned Gazprom spurned the likes of Chevron, ConocoPhillips and Total of France to announce it would develop the giant Shtokman gas fields in the Barents Sea - on its own. The Russian authorities also strong-armed Shell out of the Sakhalin project.

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