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Financial Times: Oil’s miserly sisters

Published: March 17 2007 02:00 | Last updated: March 17 2007 02:00

The international oil companies descended from the mighty “seven sisters” have been losing their grip on the world’s oil supply for years, but it is only as oil prices have settled stubbornly above $50 a barrel that the significance of the change in the industry has become clear.

The “new seven sisters”, from outside the Organisation for Economic Co-operation and Development, now hold the oil, and the whip hand. If the world’s energy demands are to be satisfied, to say nothing of oil producers’ economic interests, interfamilial relations will have to improve.

The industry invested $340bn in oil and natural gas in 2005. It sounds a lot but the International Energy Agency has described it as “inadequate”. After adjusting for double-digit cost inflation, this spending has barely risen since 2000. The future looks even less promising because in spite of record earnings and oil prices well above the marginal cost of production, oil companies are not reinvesting in the industry.

Should we blame the international oil companies, or the national oil companies, which actually control the oil? Neither group has a monopoly on incompetence but some participants are worse than others.

Saudi Aramco, Brazil’s Petrobras and Malaysia’s Petronas are three of the new seven that have shown that national oil companies can expand their own production and even tap fields beyond their borders. All of them have managed to extract the maximum benefit from their own resources as well as from foreign expertise.

Those national oil companies that have failed include Mexico’s Pemex and Venezuela’s Pdvsa. Isolating oil fields from international expertise and running them using a cossetted state monopoly is unlikely to maximise their value, even if tight political control over revenues is a handy way to fund populist social programmes. The oil is, of course, their own, but insularity is not the way to turn it into cash.

The international oil companies are not blameless either. Instead of coming up with a solution to their growing access problems, they have handed billions of dollars back to their shareholders, in effect admitting defeat. ExxonMobil has proved it can operate in the tough new climate better than most. Rivals such as Royal Dutch Shell, BP and Eni have had difficulties keeping a handle on the cost and timing of ever-more complex projects.

As a group, the international oil companies tout their technical prowess and say it sets them apart from most national oil companies. Nevertheless, they have come up with no big breakthrough in more than a decade, paying dearly for firing tens of thousands of engineers and geologists, and starving research programmes while they counted their pennies during the lean 1980s and 1990s.

Competition sharpens performance, so these boasts of expertise are largely correct. Yet humility might be wiser: oil without production expertise is inefficient, but production expertise without oil is utterly worthless.

It is perfectly clear that as the world’s thirst for oil increases, the demand both for cutting-edge technology and for the biggest and best fields will only intensify. There is much to be gained from working together, but since oil exploration is a long-term, high-risk business, not much will happen without more trust. Industry figures should try to draw up thoughtful contracts that leave all sides happy even when the oil price does something unexpected. Is this too much to ask?

Copyright The Financial Times Limited 2007

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