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Supply Drops As Oil Giants Lose Influence

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The New York Times

Published: August 31, 2008

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, such as 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 all of the commodities' prices in recent weeks, 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 such as China. The oil companies' difficulties suggest that these much-needed future supplies may be hard to come by.

Consumption Surge Pushes Prices
Oil production has failed to catch up with surging consumption in recent years, a disparity that propelled oil prices to records this year. Oil remains above $100 a barrel, unimaginable a few years ago, causing pain throughout the economy, from consumers reeling at the gas pump to airlines and automakers posting sizable losses.

The scope of the supply problem became clearer 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 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 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.

Today's 10 largest holders of petroleum reserves are state-owned companies, such as Russia's Gazprom and Iran's national oil company.

Running Out Of Drilling Spots

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 such as 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, such as deep-water reserves, heavy oil or tar sands.

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