My question is, with lower prices per barrel, American car makers going bankrupt, carbon taxes, tourism down, airlines paring down flights, job and home loss, the greenhouse gas/global warming movement - why do we need oil exploration? Here in the US, Obama wants to stop drilling in the US. We have oceans of oil in the middle of the country, in Alaska, off our coasts. Is this the beginning of the end of our oil and gas industry?
Big Oil has trouble finding new fields
Friday, February 1, 2008
These should be the best of times for Big Oil.
Petroleum prices have tripled in five years, and gasoline prices reached record heights last summer. International oil companies are making the kind of money most capitalists can only dream of.
Chevron Corp. is expected to report a record annual profit today, topping $17.5 billion. And that's less than half of what Exxon Mobil probably made last year. Exxon earned $39.5 billion in 2006 - the largest annual profit for any American company, ever - and will report its 2007 results today, as well.
And yet, for an industry awash in income, Big Oil faces serious long-term threats. Its profit and its very future are under pressure, both at home and abroad.
The large, global companies commonly known as Big Oil - companies such as Exxon, Chevron, BP and Shell - are having a hard time finding enough new oil fields to replace the petroleum they pump out of the ground. And the fields they're finding are in hard-to-reach places like the bottom of the sea, where drilling and pumping costs far more than it does on land.
The oil fields they do control account for only about 6 percent of the world's known oil reserves. Government-run companies in oil-producing countries, such as Saudi Aramco in Saudi Arabia or the National Iranian Oil Co. in Iran, have the rest.
The government-controlled companies used to need outside money and technical help to develop their oil fields. So they formed joint ventures with the Chevrons and BPs of the world to bring their petroleum to market. But now that oil costs more than $90 per barrel, the government-run oil companies have plenty of cash. They don't need Big Oil's money or its help as much as they did.
And if that weren't enough, politicians around the world are getting serious about global warming. They are discussing ways to cut greenhouse gas emissions and scale back the use of fossil fuels, which produce carbon dioxide when burned.
In other words, Big Oil's basic business - pumping and selling oil - is under attack.
"I think they are taking this seriously as an economic threat," said David Hamilton, director of the Sierra Club's global warming and energy program. "When you get to 2040, it's unclear what they're going to do."
No one expects Chevron, Exxon or their competitors to shrivel up and disappear.
The world's demand for petroleum remains ravenous - about 85 million barrels per day - and it grows each year. The oil companies are throwing tens of billions of dollars each year into finding more oil.
And they're starting to invest in renewable energy and alternative fuels. Chevron, for example, recently formed an alliance with a Silicon Valley startup trying to make fuel from algae. Although the amount the oil companies spend on alternative energy pales in comparison to their overall budgets, they appear to be trying to create a role for themselves in a carbon-constrained world.
"I think at heart they think of themselves as energy companies," said John Felmy, chief economist for the American Petroleum Institute, the industry's main lobbying group. "Production of energy of any type is at its root an engineering problem. And these companies, in terms of the people they have, have a better collection of those skills than any other companies in the world."
Chevron Chief Executive Officer David O'Reilly has often said his company can adapt to the world's changing energy picture. Chevron will supply energy in multiple forms, although he insists oil isn't about to disappear.
"We're a pretty resilient bunch," O'Reilly once said in an interview with The Chronicle. "We'll be around. We'll be selling energy. We'll be providing energy services. But I'm confident it will be quite different than it is today."
Right now, Big Oil's main business could hardly be better. Just five years ago, crude oil prices on the New York Mercantile Exchange hovered around $30 per barrel, roughly the same level they'd held for years. They briefly touched $100 last month and closed Thursday at $91.75.
One of the main reasons for that increase has been the perilously thin margin between the amount of oil the world produces and the amount it consumes. From 2003 to 2006, the last year for which complete data are available, the world's oil production grew 6.25 percent, to reach 84.6 million barrels per day, according to the federal Energy Information Administration. But demand for oil grew faster, pushed by the growing economies of China and India. Worldwide demand rose 6.43 percent to 84.73 million barrels per day.
Each oil company has been struggling to increase its production and find new oil fields, as older ones slowly dry up. Companies sometimes increase their production and oil reserves by buying each other, with Chevron's 2005 purchase of Unocal Corp. a recent example. But that tactic goes only so far. Chevron's worldwide production of oil and natural gas slipped 2 percent between 2002 and 2006, the last year for which full data are available. The company's oil and gas reserves slid 2.3 percent.
"That's a problem for the entire industry," said David Kirsch, director of market intelligence for the PFC Energy consulting firm. "The entire world's been running an oil deficit for at least a decade. We are producing more oil than we are discovering."
Chevron spokesman Donald Campbell said production can vary greatly from year to year depending on when new oil fields begin operating. Chevron has been working on one field in the Gulf of Mexico since early 2006, for example, but the field still hasn't started pumping oil.
"We're focused on big projects that take a long time to develop but have a big payoff," Campbell said. "Our growth comes in big lumps."
Debate rages over whether the world has reached "peak oil," the moment when production of this famously finite resource goes into an irreversible decline. Most industry analysts say we aren't there yet. There are still many known oil fields waiting to be tapped.
But getting the oil is another matter. The biggest newly discovered oil fields lie offshore, some in very deep water, making them expensive to reach.
Then there's the question of who controls them.
Most of the world's oil reserves lie in the hands of government-controlled oil companies. And as prices rise, those governments have become much more assertive. They have more money to develop oil fields themselves and can hire service companies to supply any technical expertise they may lack. When they form joint ventures with Big Oil, they demand a bigger share of the profit than they once did.
"The bargaining position of the resource owners is enhanced incredibly," said Kenneth Medlock, an energy studies fellow at Rice University's Baker Institute for Public Policy. As a result, peak oil isn't the problem - access is.
"I think the issue is above ground," Medlock said. "It's geopolitics instead of geology."
Venezuelan President Hugo Chavez has become the poster child for this kind of "resource nationalism" by forcing the oil companies that operate in his country to renegotiate their contracts or leave. But he's hardly the only example. Canada has been one of the United States' main oil sources for years. But recently the premier of Newfoundland and Labrador has staged a high-stakes showdown with Chevron over developing a major oil field off his province's coast. Talks between the company and Premier Danny Williams broke down in 2006, with Chevron complaining that he wanted too big a share. They started again last year, but no formal agreement has been signed.
Then there's the issue of climate change - perhaps the biggest wild card in Big Oil's future.
Many countries have already committed themselves to lowering their carbon dioxide emissions, which is hard to do without cutting back on oil and gasoline use. In the United States, congressional Democrats have made it one of their priorities, and about half of the states are exploring ways to do it if the federal government doesn't. Last year's federal energy legislation mandated a dramatic increase in the use of biofuels - alternatives to petroleum - and California is pushing ahead with its own low-carbon fuel plan.
After years of silence on global warming, or trying to prevent action on it, the oil companies are now staking out their positions. BP and ConocoPhillips have joined an organization of businesses calling for federal legislation that would require cuts in greenhouse gases. Chevron hasn't joined that group, but O'Reilly has said the world needs a plan for managing carbon dioxide emissions, and he wants the problem to be addressed by the nation, not the states.
"We're already hurtling toward a very different future," said Richard Duke, director of the Natural Resources Defense Council's center for market transformation. "The better oil majors are already out in front of this issue, at least on grappling with policy."
They're also dabbling in some of the alternative energy technologies that many people hope will one day replace petroleum. BP last year agreed to spend half a billion dollars over 10 years to create the Energy Biosciences Institute at UC Berkeley to study biofuels, although the deal outraged critics who don't want an oil company controlling academic research at a public university.
And yet, by the standards of the oil industry, the amount the companies are investing in alternative energy remains small. The future shape of policies and technologies to fight climate change will have a huge influence on how the companies spend their cash. Build an old-style gasoline refinery? Throw billions into cellulosic ethanol? Each choice involves big money, even for Big Oil.
"What they're looking at is, 'Where should we make our investments?'" said Felmy, with the American Petroleum Institute. "Pouring money into something you're not really sure is going to work isn't such a good idea."
The big money
In 2006, the three biggest oil companies reported these profits:
Exxon Mobil$39.5 billion
Chevron$17.1 billion
ConocoPhillips$15.6 billion
E-mail David R. Baker at dbaker@sfchronicle.com.
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/01/BUMDUOD7S.DTL
This article appeared on page C - 1 of the San Francisco Chronicle
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