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.
Outside the big five, Spain's Repsol-YPF has taken a shot from nationalisation of deposits in Bolivia. Even countries with less recent experience of dealing with big oil are showing themselves very aware of their negotiating power.
New OPEC member Angola has pushed for production contracts that give it a progressively greater share of revenues as international oil prices move up. In December Libya offered exploration rights to the oil majors on the condition that a high proportion of revenues be handed back to the state from the outset. On one offshore exploration block, Exxon offered 75% of oil revenues to the Tripoli government, only to be out-bid by Gazprom, which offered 90%. Also in December, Algeria imposed an exceptional profits tax and passed a law giving its state-owned oil company a majority stake in all energy exploration contracts.
There is a further factor behind the resource squeeze - the emergence of a new generation of industrialising oil importers, principally China and India, each likely to move up the rankings to get even closer to the top of the world's largest economies. In fact, a number of economists predict that China will exceed the US in gross domestic product terms by 2030 or 2040. These countries want their own NOCs to operate internationally and deliver security of oil and gas supply, and that means they too will be competing for control of deposits.
However, reports of the shrinking influence of big oil are clearly exaggerated. These commercially driven companies have some very important advantages. One is to have a clear focus on the bottom line. Many of the NOCs are in fact seen as instruments of their stakeholder government's wider economic policies, and are required not just to produce oil, but also to provide employment, help redistribute wealth and improve national integration. These are valid objectives but can cloud the hard-headed pursuit of operational efficiency. In the worst cases the NOCs can become highly politicised, overstaffed and unfocused institutions whose skilled and professional staff end up going elsewhere.
A presentation by Amy Myers Joffe, oil industry specialist at Rice University at the March conference, highlighted some of these issues. On the whole, the IOCs employ fewer people per million barrels of oil equivalent (boe) produced. In 2004 the big five average was just over 23 employees. Although some NOCs did better (Saudi Aramco had only 11 employees per million boe produced), the average for 12 of the largest was 85 employees per million boe.
Additionally, fuel produced by the state oil companies is often subsidised - which can distort the allocation of resources and knock operating efficiency sideways.
Another broad indicator of efficiency is revenue per barrel. According to Myers Joffe's figures, for the big five in 2004 this averaged US $66.17, compared to just around half, US $33.66, for 11 of the top national oil companies. Her conclusion was: "On average, NOCs that are fully government-owned and sell petroleum products at subsidised prices, will be only 35% as technically efficient as a comparable firm which is privately held and has no obligation to sell refined products at discounted prices. Most of the NOCs in OPEC countries offer subsidised fuel prices. While individual firms may vary in efficiency, on average government held firms in general exhibit only 60 - 65% of the efficiency as the privately held international oil majors."
As for ownership of reserves, it is perhaps less of a critical factor than has been suggested. Steve Chazen, chief financial officer at Occidental Petroleum recently told Dow Jones Newswires that ‘reserves shouldn't matter'. He went on: "If you move to a service contract, nothing really happens. You get the same cash flow that presumably you'd have gotten otherwise, it's just cosmetic."
Something similar, it is said, applies to that other measure of corporate importance, the volume of proven oil and gas reserves reported at the end of each year. Bruce Lanni, an analyst at AG Edwards who covers the big oil companies, says reserves ‘are still a valid measure, an important number, but you have to look beyond that'.
To summarise the counter-argument, the commercial big oil companies tend to be more efficient, more single-mindedly focused on the bottom line, and because of that, more profitable. In other words, they are likely to be better placed to mobilise the gigantic new investments that will be necessary to continue meeting rising oil and gas demand, and that will give them some renewed negotiating power.
According to the International Energy Agency no less than US $8.2 trillion will need to be spent on oil and gas developments by 2030, which works out at an average of US $328 billion a year, significantly more than over the last five years. National governments will continue to seek the best share of oil and gas revenues that they can get, but the other side has some negotiating chips of its own.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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